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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|(Mark One)                                  |                                                                                         
|------------------------------------------- | ----------------------------------------------------------------------------------------
|/x/                                         | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2001
|or                                         
|/ /                                         | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from  to         

Commission
File Number

Registrant, State of Incorporation,
Address and Telephone Number

I.R.S. Employer
Identification No.1-11377

CINERGY CORP.(A Delaware Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500

31-13850231-1232

THE CINCINNATI GAS & ELECTRIC COMPANY(An Ohio Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500

31-02400301-3543

PSI ENERGY, INC.(An Indiana Corporation)
1000 East Main Street
Plainfield, Indiana 46168
(513) 421-9500

35-05944572-7793

THE UNION LIGHT, HEAT AND POWER COMPANY(A Kentucky Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500

31-0473080


Each of the following classes or series of securities registered pursuant to Section 12(b) of the Act is registered on the New York
Stock Exchange:

Registrant

Title of each classCinergy Corp.

Common StockIncome PRIDESThe Cincinnati Gas & Electric Company

Cumulative Preferred Stock
4%Junior Subordinated Debentures
8.28%PSI Energy, Inc.

Cumulative Preferred Stock
4.32%Cumulative Preferred Stock
4.16%Cumulative Preferred Stock
67/8%


Securities registered pursuant to Section 12(g) of the Act: None

Indicate
by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that such registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /x/  No / /

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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/

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Requirements
pursuant to Item 405 of Regulation S-K are not applicable forThe Union Light, Heat and Power
Company.

The Union Light, Heat and Power Companymeets the conditions set forth in General Instruction I (1)(a) and (b) of
Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format specified in General Instruction I (2) of
Form 10-K.

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As
of January 31, 2002, the aggregate market value of the common equity ofCinergy Corp.held by nonaffiliates (shareholders who are
not directors or executive officers) was $5.1 billion. All of the common stock ofThe Cincinnati Gas & Electric Companyand PSI Energy, Inc.is owned byCinergy Corp., and all of the common stock ofThe
Union Light, Heat and Power Companyis owned byThe Cincinnati Gas & Electric Company. As of January 31, 2002, each
registrant had the following shares of common stock outstanding:

Registrant

Description

SharesCinergy Corp.

Par value $.01 per share

159,765,197The Cincinnati Gas & Electric Company

Par value $8.50 per share

89,663,086PSI Energy, Inc.

Without par value, stated value $.01 per share

53,913,701The Union Light, Heat and Power Company

Par value $15.00 per share

585,333


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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement ofCinergy Corp.and the Information Statement ofPSI
Energy, Inc.filed, or to be filed, with the Securities and Exchange Commission are incorporated by reference into Part III of this report.

This
combined Form 10-K is separately filed byCinergy Corp.,The Cincinnati Gas & Electric
Company,PSI Energy, Inc., andThe Union Light, Heat and Power Company.
Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to registrants
other than itself.

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TABLE OF CONTENTS

|Item
Number |  |                                                                                       |  | Page
Number
|----------- |  | ------------------------------------------------------------------------------------- |  | -----------
|            |  | Cautionary Statements Regarding Forward-Looking Information                           |  | 3          
|            |  | PART I                                                                                |  |            
|1           |  | Business                                                                              |  |            
|            |  | Organization                                                                          |  | 5          
|            |  | Current Trends                                                                        |  | 7          
|            |  | Business Units                                                                        |  | 8          
|            |  | Other Developments                                                                    |  | 14         
|            |  | Environmental Matters                                                                 |  | 14         
|            |  | Future Expectations/Trends                                                            |  | 15         
|2           |  | Properties                                                                            |  |            
|            |  | Energy Merchant                                                                       |  | 16         
|            |  | Regulated Businesses                                                                  |  | 18         
|3           |  | Legal Proceedings                                                                     |  |            
|            |  | New Source Review and Notices of Violation                                            |  | 19         
|            |  | Manufactured Gas Plant Sites                                                          |  | 20         
|            |  | M Metals Superfund Site                                                               |  | 21         
|            |  | Gas Customer Choice                                                                   |  | 21         
|            |  | City of Newport, Kentucky                                                             |  | 22         
|4           |  | Submission of Matters to a Vote of Security Holders                                   |  | 23         
|            |  | PART II                                                                               |  |            
|5           |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 24         
|6           |  | Selected Financial Data                                                               |  | 25         
|7           |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  |            
|            |  | Introduction                                                                          |  | 27         
|            |  | Liquidity and Capital Resources                                                       |  | 27         
|            |  | 2001 Results of OperationsHistorical                                                 |  | 39         
|            |  | 2000 Results of OperationsHistorical                                                 |  | 43         
|            |  | Results of OperationsFuture                                                          |  |            
|7A          |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 64         
|            |  | Index to Financial Statements and Financial Statement Schedules                       |  | 65         
|8           |  | Financial Statements and Supplementary Data                                           |  | 66         
|9           |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 145        
|            |  | PART III                                                                              |  |            
|10          |  | Directors and Executive Officers of the Registrants                                   |  |            
|            |  | Board of Directors                                                                    |  | 146        
|            |  | Executive Officers                                                                    |  | 147        
|11          |  | Executive Compensation                                                                |  | 151        
|12          |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 151        
|13          |  | Certain Relationships and Related Transactions                                        |  | 152        
|            |  | PART IV                                                                               |  |            
|14          |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  |            
|            |  | Financial Statements and Schedules                                                    |  | 153        
|            |  | Reports on Form 8-K                                                                   |  | 153        
|            |  | Exhibits                                                                              |  | 153        
|            |  | Signatures                                                                            |  | 166        

2

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In
this reportCinergy(which includesCinergy Corp.and all of our
regulated and non-regulated subsidiaries) is, at times, referred to in the first person as "we", "our", or "us".

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

In this report we discuss various matters that may make management's corporate vision of the future clearer for you. This report outlines management's goals and
projections for the future. These goals and projections are considered forward-looking statements and are based on management's beliefs and assumptions. These forward-looking statements are identified
by terms and phrases such as "anticipate", "believe", "intend", "estimate", "expect", "continue", "should", "could", "may", "plan", "project", "predict", "will", and similar expressions.

Forward-looking
statements involve risks and uncertainties that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to
differ are often presented with forward-looking statements. In addition, other factors could cause actual results to differ materially from those indicated in any forward-looking statement. These
include:





3

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Unless
we otherwise have a duty to do so, the Securities and Exchange Commission's (SEC) rules do not require forward-looking statements to be revised or updated (whether as a result of
changes in actual results, changes in assumptions, or other factors affecting the statements). Our forward-looking statements reflect our best beliefs as of the time they are made and may not be
updated for subsequent developments.

4

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PART I

ITEM 1.    BUSINESS

ORGANIZATION

Cinergy Corp., a Delaware corporation created in October 1994, owns all outstanding common stock of The
Cincinnati Gas & Electric Company (CG&E) and PSI Energy, Inc. (PSI), both of which are
public utility subsidiaries. As a result of this ownership, we are considered a utility holding company. Because we are a holding company with material utility subsidiaries operating in multiple
states, we are registered with and are subject to regulation by the SEC under the Public Utility Holding Company Act of 1935, as amended (PUHCA). Our other principal subsidiaries are:



CG&E, an Ohio corporation, is a combination electric and gas public utility company that provides service in the southwestern portion of
Ohio and, through its subsidiaries, in nearby areas of Kentucky and Indiana.CG&E'sprincipal subsidiary, The Union Light, Heat and Power Company
(ULH&P), is a Kentucky corporation that provides electric and gas service in northern Kentucky.CG&E'sother subsidiaries are insignificant to its results of operations.

In
2001,CG&Ebegan a transition to electric deregulation and customer choice. Currently, the competitive retail electric market in Ohio
is in the development stage.CG&Eis recovering its Public Utilities Commission of Ohio (PUCO) approved costs and retail electric rates are frozen
during this market development period. See the "Retail Market Developments" section in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion
of key elements on Ohio deregulation.

PSI, an Indiana corporation, is a vertically integrated and regulated electric utility that provides service in north central, central,
and southern Indiana.

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The
following table presents further information related to the operations of our domestic utility companies (our operating companies):

|                     |  |   |  | Principal
Line(s) of Business                                   |  | Major Cities Served                                                                             |  | Approximate
Population
Served
|-------------------- |  | - |  | --------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | -----------------------------
|CG&Eand subsidiaries |  |  |  | Generation, transmission, distribution, and sale of electricity |  | Cincinnati, OH
Middletown, OH
Covington, KY                                                     |  | 2,012,000                    
|                     |  |  |  | Sale and/or transportation of natural gas                       |  | Florence, KY
Newport, KY
Lawrenceburg, IN                                                       |  |                              
|PSI                  |  |  |  | Generation, transmission, distribution, and sale of electricity |  | Bloomington, IN
Carmel, IN
Columbus, IN
Kokomo, IN
Lafayette, IN
New Albany, IN
Terre Haute, IN |  | 2,220,000                    
|ULH&P                |  |  |  | Transmission, distribution, and sale of electricity             |  | Covington, KY
Florence, KY
Newport, KY                                                          |  | 338,000                      
|                     |  |  |  | Sale and transportation of natural gas                          |  |                                                                                                 |  |                              

Wholesale
Energy is a holding company forCinergy'senergy commodity businesses, including electric production, as the generation assets
eventually become unbundled from the utility subsidiaries. See the "Retail Market Developments" section in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion on Ohio deregulation. Cinergy Power Generation Services, LLC (Generation Services), a wholly-owned subsidiary of Wholesale Energy, provides electric
production-related construction, operation and maintenance services to certain affiliates and non-affiliated third parties.

Services
is a service company that provides our subsidiaries with a variety of centralized administrative, management, and support services. Investments holds most of our domestic
non-regulated, energy-related businesses and investments. Global Resources holds most of our international businesses and investments and directs our renewable energy investing activities
(for example, wind farms). Technologies primarily holds our portfolio of technology-related investments.

We
have collective bargaining agreements with the International Brotherhood of Electrical Workers (IBEW), the United Steelworkers of America (USWA), the Independent Utilities Union
(IUU), and various international union organizations.

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The
following table indicates the number of employees by classification at December 31, 2001:

|                            |  | Regulated |  | Non-Regulated |  |    
|--------------------------- |  | --------- |  | ------------- |  | ---
|
|IBEW(1)                     |  | 525       |  | 1,313         |  | 58 
|USWA(2)                     |  | 296       |  |              |  | 90 
|IUU(3)                      |  | 428       |  |              |  | 61 
|Various Union Organizations |  |          |  |              |  |   
|Non-Bargaining              |  | 234       |  | 410           |  | 25 
|                            |  |           |  |               |  |    
|                            |  | 1,483     |  | 1,723         |  | 234

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CURRENT TRENDS

For many years our industry has been relatively stable and dominated by vertically integrated companies. However, in recent years a number of federal and state
developments, aimed at promoting competition, initiated a de-integration of the traditional value chain and triggered industry restructuring.

New
business models are emerging as market participants seek to exploit opportunities along the de-integrated value chain. The market place is being characterized by
independent power producers, energy marketers and traders, energy merchants, transmission and distribution providers and retail energy suppliers. New market entrants and activity among the traditional
participants, such as mergers,
acquisitions, asset sales and spin-offs of lines of business, are reshaping the industry. Power generators are attempting to differentiate themselves to attract a new customer base; large
wholesalers are expanding through acquisitions of regional businesses; transmission systems are being operated by Regional Transmission Operators; and the sale of retail energy is no longer the
exclusive business of the traditional integrated utility.

By
the end of 2000, approximately one-half of the states and the District of Columbia had adopted deregulation plans. However, recent events are significantly influencing
political and legislative activity. In late 2000 and early 2001, California experienced unprecedented high prices, extreme price volatility, a lack of market liquidity and inadequate generation
supply, leading to customer blackouts. Ultimately, California's two largest utilities accumulated significant unpaid obligations, which resulted in one of the utilities declaring bankruptcy during
2001. In December 2001, Enron Corp. (Enron), a dominant energy trader and seventh largest company of the Fortune 500 in terms of revenue, filed for bankruptcy protection after disclosing
substantial third quarter losses and a restatement of prior period results,

7

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which contributed to a significant downgrade in its credit ratings. The SEC, the Federal Energy Regulatory Commission (FERC), the U.S. Department of Justice (Justice Department) and numerous
Congressional committees are investigating Enron's collapse. These recent events could significantly influence the future industry landscape. In 2001, eight of the states which had previously adopted
deregulation plans, including California, decided to delay or suspend their activities. No additional states passed deregulation legislation in 2001.

Within
our own service territory, in 1999 Ohio enacted legislation which deregulated electric generation and provided for retail competition beginning in January 2001. In
December 2001, the PUCO indicated that while still in the early stages of electric choice, "the campaign is successfully on track". The states of Indiana and Kentucky have not passed
restructuring legislation. A special Kentucky Electricity Restructuring Task Force established in 2000 found no compelling reasons for Kentucky to act on the issue of deregulation and recommended the
Kentucky General Assembly wait until 2002 to reconsider any type of legislation.

BUSINESS UNITS

We conduct operations through our subsidiaries, and manage through the following three business units:



The
following section describes the activities of our business units as of December 31, 2001. See Note 16 of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data" for financial information by business segment.

Energy Merchant

Energy Merchant manages wholesale generation and the domestic and foreign energy marketing and trading of energy commodities. Energy Merchant operates and
maintains our regulated and non-regulated electric generating plants including some of our jointly-owned plants, both domestically and abroad. As of December 31, 2001, the total
winter electric capability (including our portion of the total capacity for the jointly-owned plants) of our domestic generating plants was 13,088 megawatts (MW). Approximately 75% of this generation
portfolio is coal-fired. See "Item 2. Properties" for a further discussion of the generating facilities.

Energy
Merchant also conducts the following activities:



See
the "Market Risk Sensitive Instruments and Positions" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for information on
risks associated with these activities.

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Fuel Supply

Each year, throughCG&EandPSI, we purchase approximately
29 million tons of coal to generate electricity. We purchase approximately 80% of our coal supply through long-term coal supply agreements and approximately 20% through the spot
market or through short-term supply agreements. We receive our coal supply primarily from mines located in Indiana, West Virginia, Ohio, Kentucky, Pennsylvania, and Illinois. In early
2001, the market price for coal increased due to the buildup of inventories at various generators and the low production levels of coal mines. However, we anticipate the market prices of coal to level
off in 2002.

Cinergyhas a fleet of natural gas-fired peaking plants that have a capacity of 2,695 MW. The fuel for these units is obtained
through the natural gas open market. For further information on the risk of purchasing natural gas see the "Market Risk Sensitive Instruments and Positions" section of "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations".

Energy
Merchant monitors alternative sources of coal and gas to assure a continuing availability of economical fuel supplies. As such, it will maintain its practice of purchasing a
portion of coal and gas requirements on the open market and will continue to investigate least-cost coal options to comply with new and existing environmental requirements. Cinergy,CG&E, andPSIbelieve that they can continue to
obtain enough coal and gas to meet future needs. However, future environmental requirements may significantly impact the availability and price of these fuels.

Purchased Power

At times, we purchase power to meet the energy needs of our wholesale customers and to meet the requirements of our retail native load customers
(end-use customers within our operating companies' franchise territory). Factors that could causeCinergyto purchase power for retail
native load customers include generating plant outages, extreme weather conditions, growth, and other factors associated with supplying full requirements electricity. We believe we can obtain enough
purchased power to meet future needs. However, during periods of excessive demand, the price and availability of these purchases may be significantly impacted. See the "Significant Rate Developments"
section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information onPSI'sPurchased
Power Tracker.

Trading Operations and Risk Management

Energy Merchant's energy marketing and trading activities principally consist of energy marketing and trading operations for CG&E,PSI, and Cinergy Capital & Trading, Inc. (Capital & Trading).CG&EandPSIprincipally market and trade over-the-counter (an informal market
where the buying/selling of commodities occurs) contracts for the purchase and sale of electricity, primarily in the Midwest region of the U.S. Energy Merchant also actively markets physical natural
gas through Cinergy Marketing & Trading, LP's gas trading operations. See the "Market Risk Sensitive Instruments and Positions" section of "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" for information on risks associated with these activities.

International

As of December 31, 2001, we had ownership interests in generation assets located in seven countries. The majority of these assets are district heating
plants in the Czech Republic, of which we own 100% of four plants and have a minority interest in the fifth. These assets serve retail and wholesale customers in the Czech Republic.

9

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Regulated Businesses

Regulated Businesses consists of a regulated, integrated utility, and regulated electric and gas transmission and distribution systems. Regulated Businesses
plans, constructs, operates, and maintainsCinergy'stransmission and distribution systems and delivers gas and electric energy to consumers, both
domestically and abroad. Regulated Businesses operated approximately 46,100 circuit miles (the total length in miles of separate circuits) of domestic electric lines to provide regulated transmission
and distribution service to 1.5 million customers as of December 31, 2001.

Regulated
Businesses operated approximately 8,200 miles of gas mains (gas distribution lines that serve as a common source of supply for more than one service line) and service lines to
provide domestic regulated transmission and distribution services to approximately 495,000 customers as of December 31, 2001. See "Item 2. Properties" for a further discussion of the
transmission and distribution systems owned by our operating companies.

Electric Operations

Regulated Businesses (through our operating companies) and other non-affiliated utilities in a nine-state region are parties to the East
Central Area Reliability Council Agreement (ECAR Agreement). The ECAR Agreement coordinates the planning and operation of generation and transmission facilities, which provides for maximum reliability
of regional bulk power supply.

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Transmission System Interconnections

The following map illustrates the interconnections between our electric systems and other electric systems.

MAP

Midwest Independent Transmission System Operator, Inc. (Midwest ISO)

As part of the effort to create a competitive wholesale power marketplace, the FERC approved the formation of the Midwest ISO during 1998. In that same year, Cinergyagreed to join the Midwest ISO in preparation for meeting anticipated changes in the FERC regulations and future deregulation requirements. The
Midwest ISO was established as a non-profit organization to maintain functional control over the combined transmission systems of its members. For further information on the Midwest ISO,
see the "Midwest Independent Transmission System Operator, Inc." section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".

11

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Electricity Supply

Regulated Businesses currently receives its electricity from Energy Merchant at a transfer price based upon current regulatory ratemaking methodology. With the
implementation of electric deregulation in Ohio, effective January 1, 2001, Regulated Businesses continues, through a market development period, to acquire its electricity requirements through
Energy Merchant for those retail customers who do not switch suppliers.

ULH&Ppurchases energy fromCG&Epursuant to a new contract effective January 1,
2002, which was approved by the FERC and the Kentucky Public Service Commission (KPSC). This five-year agreement is a negotiated fixed-rate contract with CG&Eand replaces the previous cost of
service based contract, which expired on December 31, 2001.

For
further details on electricity supply ofCG&E,PSI, and ULH&P, refer to the "Retail Market
Developments" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations".

Gas Supply

Regulated Businesses is responsible for the purchase and the subsequent delivery of natural gas to native load customers. Regulated Businesses' natural gas
procurement strategy is to buy firm gas supplies (gas intended to be available at all times) and firm interstate pipeline capacity during the winter season (November through March) and buy spot supply
and capacity during the non-heating season (April through October). This strategy allows Regulated Businesses to assure reliable gas supply for its high priority
(non-curtailable) customers during peak winter conditions and provides Regulated Businesses the flexibility to reduce its contract commitments if firm customers choose alternate gas
suppliers under the Regulated Businesses' customer choice/gas transportation programs. In 2001, firm supply purchase commitment agreements provided approximately 56% of the natural gas supply with the
remaining gas purchased on the spot market. These firm supply agreements feature two levels of gas supply, specifically (1) base load, which is a continuous supply to meet normal demand
requirements, and (2) swing load, which is gas available on a daily basis to accommodate changes in demand due primarily to changing weather conditions. Regulated Businesses pays reservation
charges for base and swing load.

Regulated
Businesses manages gas procurement-hedging programs forCG&EandULH&P. These
programs include the use of fixed purchase prices as well as variable price arrangements (collars), which have a minimum (floor) and maximum (cap) established on the price to be paid. ULH&Phas
received approval from the KPSC for its hedging program. In accordance with a PUCO ruling, CG&Emay apply for approval of its hedging program on an after-the-fact basis. As of December 31, 2001,
 both CG&EandULH&Phad hedged approximately 50% of their winter 2001/2002 base load requirements. See the
"Gas Industry" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for further information.

Interstate
pipelines either (1) transport gas purchased directly to the distribution systems or (2) inject gas purchased into pipeline storage facilities for future
withdrawal and delivery. The majority of the gas supply comes from the Gulf of Mexico coastal areas of Texas and Louisiana. In addition, a limited supply comes from the mid-continent
(Arkansas-Oklahoma) basin. Also, industrial transportation customers behindCinergy'scity gate (point where the distribution system connects to an
interstate gas pipeline) are obtaining methane gas recovered locally from an Ohio landfill.

Regulated
Businesses expects the natural gas market will remain competitive in future years. Throughout the year 2001, natural gas prices returned to more normal levels. However,
short-term price fluctuations, such as those that occurred in late 2000 and early 2001, could reappear, and reflect the effects of weather conditions, availability of supply, and changes
in demand and storage inventories.

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Currently, neitherCG&EnorULH&Pprofit from changes in the cost of gas. Natural gas purchase costs
are passed directly to the customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law.

In
December 2001,CG&EandULH&Pentered into an agreement with Mirant Americas
Energy Marketing, LP (Mirant) to manage their interstate pipeline transportation and storage capacity and gas supply contracts. Under this agreement, which expires in October 2003,
Mirant is obligated to deliver gas to meetCG&E'sandULH&P'sfirm requirements.

International

Regulated Businesses also manages our international electric transmission and distribution systems and natural-gas distribution systems business
holdings, which include wholly-owned or jointly-owned companies in four foreign countries, namely Zambia, South Africa, Estonia, and Greece.

Revenue Data and Customer Base

The percent of retail operating revenues derived from electricity and gas sales, including transportation, for each of the three years ended December 31
were as follows:

|                     |  | Retail Operating Revenues
|-------------------- |  | -------------------------
|
|
|
|Cinergy(1)           |  | 81                       
|CG&Eand subsidiaries |  | 71                       
|PSI                  |  | 100                      
|ULH&P                |  | 68                       

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Electric
and gas sales are seasonal. Electricity usage in our service territory peaks during the summer and gas usage peaks during the winter. Air conditioning increases electricity
demand and heating increases electricity and gas demand.

The
service territory ofCG&Eand its utility subsidiaries, includingULH&P, is heavily
populated and is characterized by a stable residential customer base and a diverse mix of industrial customers. The territory served byPSIis composed
of residential, agricultural, and widely diversified industrial customers. No single customer provides more than ten percent of total operating revenues (electric or gas) for any of our operating
companies.

Power Technology

Power Technology primarily manages the development, marketing, and sales of our non-regulated retail energy and energy-related businesses. This is
accomplished through various subsidiaries and joint ventures and includes the following products and services:



13

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Power
Technology also manages Cinergy Ventures, LLC (Ventures),Cinergy'sventure capital subsidiary. Ventures invests in emerging
energy technologies that can benefit futureCinergybusiness development activities.

OTHER DEVELOPMENTS

Investment in "Exempt Wholesale Generators" (EWG) and "Foreign Utility Companies" (FUCO)

Our ability to invest in growth initiatives, such as EWGs and FUCOs is limited by certain legal and regulatory requirements, including the PUHCA. An EWG is an
entity, certified by the FERC, devoted exclusively to owning and/or operating and selling power from one or more electric generating facilities. An EWG whose generating facilities are located in the
U.S. is limited to making only wholesale sales of electricity. FUCOs are companies whose utility assets and operations are located outside the U.S. and which are used for the generation, transmission,
or distribution of electric energy for sale at retail or wholesale, or the distribution of gas at retail. An entity claiming status as a FUCO must provide notification thereof to the SEC under PUHCA.

In
March 1998, the SEC granted us authority under PUHCA to invest in EWGs and FUCOs in an aggregate amount equal to our consolidated retained earnings, as determined from time to
time. Following our request for an increase in investment authority, in May 2001, the SEC issued a supplemental order, authorizing us to invest an additional $2 billion in EWGs and
FUCOs, in addition to an amount equal to our consolidated retained earnings. See the "Liquidity and Capital Resources" section of "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" for information on other investing activities.

Sale of Common Stock

On February 19, 2002,Cinergy Corp.filed a registration statement to increase the available issuance under the
shelf registration statement filed in November 2001, to approximately $200 million. On February 22, 2002,Cinergy Corp.sold 6.5 million shares
of common stock ofCinergy Corp.with net proceeds of approximately $200 million under these registration statements. The net proceeds from the
transaction were used to reduce short-term debt ofCinergy Corp.and its subsidiaries and for other general corporate purposes.

Sales of Accounts Receivable

On February 19, 2002,CG&E,PSI, and ULH&Preplaced their existing agreement to sell certain of their accounts receivable and related collections.Cinergy
Corp.formed Cinergy Receivables Company, LLC (Cinergy Receivables) to purchase, on a revolving basis, nearly all of the retail accounts receivable and related collections of CG&E,PSI, andULH&Pin exchange for a note payable.
Cinergy Receivables is not consolidated byCinergy Corp.since it meets the requirements of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilitiesto be considered a qualified special-purpose entity.
Cinergy Receivables has an agreement with unrelated parties to borrow up to $400 million, collateralized by its purchased receivables. Cinergy Receivables uses the proceeds from those borrowings to
reduce the note payable withCG&E,PSI, andULH&P. CG&Eretains servicing responsibilities for its role as a collection agent on the amounts due on the sold receivables. However, Cinergy Receivables
assumes the risk of
collection on the purchased receivables without recourse toCG&E,PSI, and ULH&Pin the event of a
loss.

ENVIRONMENTAL MATTERS

On December 21, 2000,Cinergy,CG&E, and PSIreached an agreement in principle with the U.S. Environmental Protection Agency (EPA), the Justice Department, three northeast states, and two

14

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environmental groups that could serve as the basis for a negotiated resolution of Clean Air Act (CAA) Amendments claims and other related matters brought against coal-fired power plants
owned and operated byCinergy'soperating companies. The estimated cost for these capital expenditures is expected to be approximately
$700 million. These capital expenditures are in addition to our previously announced commitment to install nitrogen oxide (NOX) controls at an estimated cost of approximately
$800 million (in nominal dollars) between 2001 and 2005. In 2001, we spent $260 million for NOX and other environmental compliance projects. Forecasted expenditures for
NOX and other environmental compliance projects (in nominal dollars) are approximately $250 million for 2002 and $600 million for the 2002-2006 period. See
Note 13 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data" for a discussion of the EPA Agreement and related environmental issues.

FUTURE EXPECTATIONS/TRENDS

See the information appearing under the same caption in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for
the following discussions:



15

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ITEM 2. PROPERTIES

ENERGY MERCHANT

Our operating companies' total winter electric capabilities, reflected in MW, as of December 31, 2001, are shown in the table that follows. Our electric
generating plants are located in Ohio, Kentucky, and Indiana and are wholly-owned or jointly-owned facilities.

|Registrant(1) |  | Stations |  | Coal
MW |  | Natural
Gas
MW |  | Oil
MW |  | Hydro
MW |  | Total
MW
|------------- |  | -------- |  | ------- |  | -------------- |  | ------ |  | -------- |  | --------
|CG&E          |  | 9        |  | 4,186   |  | 736            |  | 323    |  |         |  | 5,245   
|PSI           |  | 9        |  | 5,578   |  | 120            |  | 261    |  | 45       |  | 6,004   
|              |  |          |  |         |  |                |  |        |  |          |  |         
|Total         |  | 18       |  | 9,764   |  | 856            |  | 584    |  | 45       |  | 11,249  
|              |  |          |  |         |  |                |  |        |  |          |  |         

---

During
2001, electric generating plants, including those that we own but do not operate, performed reliably, as evidenced by our annual capacity factor of 68% (excluding natural gas and
fuel oil peaking stations), a utilization factor at greater than 84% and an equivalent availability factor of 82%. A capacity factor is a percentage that indicates how much of a power plant's capacity
is used over time. A utilization factor is a percentage that indicates how much of a power plant's capacity is used while being available. An equivalent availability factor is a percentage that
indicates how much a unit is available to generate compared to its potential maximum generation.

In
August 2001, we experienced record peak loads of 11,083 MW, 5,094 MW, and 6,019 MW forCinergy, CG&E, andPSI, respectively. At times, we purchase power to meet the energy needs of our wholesale
customers and to meet the requirements of our retail native load customers. Factors that could causeCinergyto purchase power for retail native load
customers include outages, extreme weather conditions, growth, economics, and other factors associated with supplying full requirements electricity. We believe we can obtain enough purchased power to
meet future needs.

Ohio Deregulation

After receipt of FERC, SEC, and applicable third-party approvals and consents,CG&Eanticipates transferring its
generating stations and their related assets and obligations to an EWG affiliate. Subsequent to this transfer,CG&Ewill continue operations as a
transmission and distribution company. To facilitate this transfer, the generation assets ofCG&E, as of August 2000, were released from the
first mortgage indenture lien allowing them to move unencumbered to the EWG affiliate. Generating assets added after August 2000, remain subject to the lien of CG&E'sfirst mortgage bond
indenture and will require release at some future date prior to being transferred. For a further discussion on Ohio
deregulation, see the "Retail Market Developments" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".

Merchant Plants

Domestic

In March 2001, Capital & Trading completed the acquisition of the 480 MW Brownsville generation facility located in Haywood County, Tennessee and
the 550 MW Caledonia generation facility located in Lowndes County, Mississippi. Brownsville has four natural gas-fired combustion turbines and Caledonia has six.

16

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In
June 2001, Capital & Trading and Duke announced they would dissolve their partnership, which was formed in 1999 for the purpose of jointly constructing and owning three
wholesale generating facilities. In September 2001, the partnership was dissolved and Capital & Trading obtained ownership of the wholesale generating facilities located in Butler
County, Ohio (680 MW) and Henry County, Indiana (129 MW). In exchange for the two generating facilities, Duke received the Vermillion County, Indiana (680 MW) generating facility,
which will be operated byCinergyuntil June 2005. See the "Wholesale Market Developments" section of "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further discussion.

At
December 31, 2001, our domestic merchant plant capacity consisted of four gas-fired peaking plants with a total capacity of 1,839 MW. However, in
December 2001,PSIpetitioned the Indiana Utility Regulatory Commission to transfer the Henry County, Indiana, and Butler County, Ohio,
gas-fired peaking plants to its regulated operations to serve its growing demand in Indiana. See the "Significant Rate Developments" section of "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" for more information.

International

As of December 31, 2001, we had ownership interests in generation assets located in seven countries. The majority of these assets are district heating
plants in the Czech Republic, of which we own 100% of four plants and have a minority interest in the fifth. These assets serve retail and wholesale customers in the Czech Republic.

Cogeneration

In 1997,Cinergyand Trigen Energy Corporation entered into a joint venture agreement to develop, construct, own,
operate, and maintain combined heat and power facilities for large industrial customers. As of December 31, 2001, we had an ownership interest in and/or operated seven domestic cogeneration
plants producing 548 MW of electricity through our Trigen-Cinergy Solutions LLC joint venture. Cogeneration is the simultaneous production of two or more forms of useable energy from a single
fuel source. During 2002-2003, Cinergy Solutions, Inc. (Cinergy Solutions) anticipates completing construction of four new cogeneration plants, which will produce an additional
772 MW of electricity.

In
October 2000, Cinergy Solutions announced a partnership with British Petroleum Global Power, Inc. (BP) to construct, own, and operate two new cogeneration plants for
BP's Texas City, Texas, and Chocolate Bayou, Texas, refining and chemical sites. In May 2001, BP cancelled the Chocolate Bayou project. The operation of the Texas City cogeneration plant will
coincide with the decommissioning of older, less efficient energy facilities. This new plant, along with existing facilities to be acquired by the partnership, will produce 705 MW of electricity. The
Texas City plant is scheduled to be operational in 2004.

17

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REGULATED BUSINESSES

Electric

Metrics for our operating companies' electric transmission and distribution systems located in Ohio, Kentucky, and Indiana (excluding our proportionate share of
jointly-owned facilities) are as follows:

|Registrant           |                    | Electric
Transmission
Systems |     | Electric
Distribution
Systems |       | Substation
Combined
Capacity
|-------------------- | ------------------ | ----------------------------- | --- | ----------------------------- | ----- | ----------------------------
|
|CG&E                 |                    | 1,652                         |     | 15,489                        |       | 20,951,521                  
|                     | ULH&P              |                               | 105 |                               | 2,708 |                             
|                     | Other subsidiaries |                               | 40  |                               |      |                             
|                     |                    |                               |     |                               |       |                             
|CG&Eand subsidiaries |                    | 1,797                         |     | 18,197                        |       | 22,165,519                  
|PSI                  |                    | 5,387                         |     | 20,707                        |       | 29,413,407                  
|                     |                    |                               |     |                               |       |                             
|Total                |                    | 7,184                         |     | 38,904                        |       | 51,578,926                  
|                     |                    |                               |     |                               |       |                             

---

At
the end of 2001, our operating companies' electric systems were interconnected with fifteen other utilities.

Our
electric transmission and distribution systems are designed and constructed to further the goal of providing reliable service to our customers. Every effort is made to ensure that
sufficient facilities are in service to meet this goal without installing facilities beyond what is required to operate reliably and
within the design or designed parameters. Through our ongoing review of these systems, enhancements are developed and constructed to meet our planning, loading, and reliability guidelines. This
process allows us to prudently invest in capacity additions only when and where they are required.

Gas

As of December 31, 2001, the natural gas transmission and distribution systems ofCG&Eand its subsidiaries
had approximately 8,200 miles of mains and service lines located in southwestern Ohio, southeastern Indiana, and northern Kentucky.CG&Eand its
subsidiaries also jointly own three underground caverns with a total storage capacity of 22 million gallons of liquid propane. As of December 31, 2001, we had 17 million gallons
of liquid propane in storage. This liquid propane is used in the three propane/air peak shaving plants located in Ohio and Kentucky to convert liquid propane into natural gas to be used only during
peak demand periods and emergencies. During 2001,CG&Eand its subsidiaries' natural gas transmission and distribution systems operated reliably, at a
load factor of 37%.

In
December 2001,CG&EandULH&Pentered into an agreement with Mirant to manage CG&E'sandULH&P'sinterstate pipeline transportation and storage capacity and gas supply contracts. The
agreement expires in October 2003. Under this agreement, Mirant is obligated to deliver gas to meetCG&E'sand ULH&P'sfirm requirements.

International

We own interests in approximately 2,700 miles of gas and electric transmission and distribution systems through jointly-owned investments in four countries. We
serve approximately 59,600 transmission and distribution customers. In November 2001, Attiki Denmark ApS, a joint venture between CGP Global Greece Holdings S.A., (an indirect wholly-owned
subsidiary ofCinergy) and Shell Gas B.V. closed on its transaction to acquire a 49% interest in Attiki Gas Supply Company S.A. (Attiki Gas).
Attiki Gas distributes, supplies, and sells natural gas to retail customers in the Athens, Greece area.

18

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ITEM 3.    LEGAL PROCEEDINGS

NEW SOURCE REVIEW (NSR) AND NOTICES OF VIOLATION (NOV)

The CAA's NSR provisions require that a company obtain a pre-construction permit if it plans to build a new stationary source of pollution or make a
major modification to an existing facility, unless the changes are exempt. In July 1998, the EPA requested comments on proposed revisions to the NSR rules that could have the affect of changing
NSR applicability by limiting exemptions contained in the current regulation. On June 22, 2001, the EPA issued an NSR 90-Day Review Paper and scheduled four public forums across the
U.S. to gather more information on the impacts of NSR.Cinergyprovided oral testimony at an EPA public forum held in Cincinnati, Ohio, on
July 10, 2001, and submitted written comments as well.

Since
July 1999,CG&EandPSIhave received requests from the EPA
(Region 5), under Section 114 of the CAA, seeking documents and information regarding capital and maintenance expenditures at several of their respective generating stations. These
requests were part of an industry-wide investigation assessing compliance with the NSR and the New Source Performance Standards (NSPS) of the CAA at electric generating stations.

On
September 15, 1999, November 3, 1999, and February 2, 2001, the Attorneys General of New York, Connecticut, and New Jersey, respectively, issued letters notifying CinergyandCG&Eof their intent to sue under the citizens' suit provisions of the CAA. These states
allege violations of the CAA by constructing and continuing to operate a major modification ofCG&E'sW.C. Beckjord Generating Station (Beckjord
Station) without obtaining the required NSR pre-construction permits.

On
November 3, 1999, the EPA sued a number of holding companies and electric utilities, includingCinergy, CG&E, andPSI, in various U.S. District Courts (District Court). The Cinergy,CG&E, andPSIsuit alleged violations of the
CAA at two of our generating stations relating to NSR and NSPS requirements. The suit sought (1) injunctive relief to require installation of pollution control technology on each of the
generating units at Beckjord Station and atPSI'sCayuga Generating Station (Cayuga Station), and (2) civil penalties in amounts of up to $27,500
per day for each violation.

On
March 1, 2000, the EPA filed an amended complaint againstCinergy,CG&E, and PSI. The amended
complaint added alleged violations of the NSR requirements of the CAA at two of our generating stations contained in an NOV filed by
the EPA on November 3, 1999. It also added claims for relief of alleged violations of nonattainment NSR, Indiana and Ohio State Implementation Plans (SIP), and particulate matter emission
limits.

The
amended complaint sought (1) injunctive relief to require installation of pollution control technology on each of the generating units at Beckjord Station and PSI'sCayuga Station, Wabash River
Generating Station, and Gallagher Generating Station, and such other measures as necessary, and (2) civil
penalties in amounts of up to $27,500 per day for each violation.

On
March 1, 2000, the EPA also filed an amended complaint in a separate lawsuit alleging violations of the CAA relating to NSR, Prevention of Significant Deterioration (PSD), and
Ohio SIP requirements regarding various generating stations, including a generating station operated by the CSP and jointly-owned by CSP, DP&L, and CG&E. The EPA is seeking injunctive relief and
civil penalties of up to $27,500 per day for each violation. This suit is being defended by CSP. On
April 4, 2001, the District Court in that case ruled that neither the Government nor the intervening plaintiff environmental groups could obtain civil penalties for any alleged violations that
occurred more than five years prior to the filing of the complaint, but that both parties could seek injunctive relief for alleged violations that occurred more than five years before the filing of
the complaint. Thus, if the plaintiffs prevail in their claims, any calculation for penalties will not start on the date of the alleged violations, unless those alleged violations occurred after
November 3, 1994, but CSP would be forced to install the controls required under the CAA. Neither party appealed that decision.

19

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On
June 28, 2000, the EPA issued an NOV toCinergy,CG&E, and PSIfor alleged violations of NSR, PSD,
and SIP requirements atCG&E'sMiami Fort Generating Station and PSI'sGibson Generating Station. In addition,Cinergyand CG&Ehave been informed by DP&L, the operator of J.M. Stuart Generating Station (Stuart Station), that on June 30, 2000, the EPA issued an NOV
to
DP&L for alleged violations of NSR, PSD, and SIP requirements at this station.CG&Eowns 39% of Stuart Station. The NOVs indicated that the EPA may
(1) issue an order requiring compliance with the requirements of the SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each
violation.

On
August 2, 2001, the states of New York, New Jersey, and Connecticut filed an Assented to Motion to Intervene in this litigation. Their motion was granted by the District Court
on August 3, 2001. The states' proposed complaint is an exhibit to the motion to intervene.Cinergy, CG&E, andPSIare in the process of evaluating the states' complaint but, at this time, are unable to
determine the effect, if any, this filing will have on the issues affecting us regarding NSR, as framed in the EPA's Amended Complaint.

See
Note 13(f) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data" for a discussion of the tentative EPA Agreement.

MANUFACTURED GAS PLANT SITES (MGP)



Prior
to the 1950s, gas was produced at MGP sites through a process that involved the heating of coal and/or oil. The gas produced from this process was sold for residential, commercial,
and industrial uses.



Coal
tar residues, related hydrocarbons, and various metals associated with MGP sites have been found at former MGP sites in Indiana, including at least 21 sites which PSIor its predecessors previously
owned.PSIacquired four of the sites from NIPSCO in 1931. At the
same time,PSIsold NIPSCO the sites located in Goshen and Warsaw, Indiana. In 1945,PSIsold 19 of
these sites (including the four sites it acquired from NIPSCO) to the predecessor of the Indiana Gas Company, Inc. (IGC). IGC later sold the site located in Rochester, Indiana to NIPSCO.

IGC
(in 1994) and NIPSCO (in 1995) both made claims againstPSI. The basis of these claims was that PSIis a Potentially Responsible Party with respect to the
21 MGP sites under the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA). The claims further asserted thatPSIwas legally responsible for the costs of investigating and remediating the sites. In August 1997,
NIPSCO filed suit againstPSIin federal court, claiming recovery (pursuant to CERCLA) of NIPSCO's past and future costs of investigating and
remediating MGP-related contamination at the Goshen MGP site.

In
November 1998, NIPSCO, IGC, andPSIentered into a Site Participation and Cost Sharing Agreement (Agreement). This Agreement
allocated CERCLA liability for past and future costs at seven MGP sites in Indiana among the three companies. As a result of the Agreement, NIPSCO's lawsuit against PSIwas dismissed. The parties have
assigned lead responsibility for managing further investigation and remediation activities at each of the sites to
one of the parties. Similar agreements were reached between IGC andPSIthat allocate CERCLA liability at 14 MGP sites with which NIPSCO was not
involved. These agreements concluded all CERCLA and similar claims between the three companies related to MGP sites. The parties continue to investigate and remediate the sites, as

20

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appropriate under the agreements and applicable laws. The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of some of the sites.

PSInotified its insurance carriers of the claims related to MGP sites raised by IGC, NIPSCO, and IDEM. In April 1998, PSIfiled suit in Hendricks County Circuit
Court in the State of Indiana against its general liability insurance carriers. Subsequently, PSIsought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI, or (2) payPSI'scosts of defense and compensate PSIfor its costs of investigating, preventing,
mitigating, and remediating damage to property and paying claims related to MGP sites. The lawsuit was
moved to the Hendricks Superior Court (Superior Court) in July 1998. Discovery closed in the case at the end of August 2001.PSIand its
insurance carriers filed briefs on various issues for decision by the Superior Court in hearings held in November 2001. In December 2001, the Superior Court rescheduled the trial to
June 2002. On February 1, 2002, the Superior Court issued rulings on motions for summary judgment. The Superior Court granted the motions of several insurance carriers who claimed that
there was insufficient evidence concerning the terms of their policies. The insurance policies in question were between 1950-1958 and 1961-1964. With respect to the remaining
policies (between 1958-1961 and 1964-1984), the Superior Court denied all of the insurance carriers' motions. This included motions on the issues of Trigger of Coverage,
Expected or Intended Damage, Late Notice and Voluntary Payments. The Superior Court found triable issues of fact for the jury to decide as to the former two issues, and ruled in PSI'sfavor, as a matter
of law, on the latter two issues. The trial against the remaining insurance carriers will go forward in June 2002. At
the present time,PSIcannot predict the outcome of this litigation.

PSIhas accrued costs for the sites related to investigation, remediation, and groundwater monitoring to the extent such costs are
probable and can be reasonably estimated.PSIdoes not believe it can provide an estimate of the reasonably possible total remediation costs for any
site before a remedial investigation/feasibility study has been completed. To the extent remediation is necessary, the timing of the remediation activities impacts the cost of remediation. Therefore, PSIcurrently cannot determine the total costs that may be incurred in connection with the remediation of all sites, to the extent that remediation is
required. According to current information, these future costs at the 21 Indiana MGP sites are not material to our financial condition or results of operations. Until investigation and remediation
activities have been completed on these sites, we are unable to reasonably estimate the total costs and impact on our financial position or results of operations.

M METALS SUPERFUND SITE

On July 6, 2000, the EPA identifiedPSIand IPL, among others, as Potentially Responsible Parties for the
release of hazardous substances at the M Metals Superfund Site (Site) located in Indianapolis, Indiana. The EPA advised that it had taken response actions relating to the Site and had incurred costs
of approximately $500,000, for which it demanded reimbursement. On September 25, 2001,PSIand the EPA signed an Agreement for Recovery of Past
Response Costs (The Agreement), which called forPSIto compensate the EPA $100,000 for costs incurred by the EPA in cleaning up the M Metals site. The
Agreement became final on November 28, 2001, andPSItendered payment to the EPA, closing this matter.

GAS CUSTOMER CHOICE

In January 2000, Investments sold Cinergy Resources, Inc. (Resources), a former subsidiary, to Licking Rural Electrification, Inc. doing
business as The Energy Cooperative (Energy Cooperative). In February 2001,Cinergy,CG&E, and
Resources were named as defendants in three class action lawsuits relating to Energy Cooperative's removal from the Ohio Gas Customer Choice program and the failure to deliver gas to customers.
Subsequently, these class action suits were amended and consolidated into one suit.CG&Ehas been dismissed as a defendant in the consolidated suit. In
March 2001,Cinergy,

21

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CG&E, and Investments were named as defendants in a lawsuit filed by both Energy Cooperative and Resources. This lawsuit concerns any obligations or liabilities Investments
may have to Energy Cooperative following its sale of Resources. We intend to vigorously defend these lawsuits. At the present time,Cinergycannot
predict the outcome of these suits.

CITY OF NEWPORT, KENTUCKY

On January 29, 2002,ULH&Pinstituted litigation proceedings in the Campbell County Circuit Court in the
Commonwealth of Kentucky against the City of Newport, Kentucky, City of Newport doing business as (d/b/a/) the Newport Water Works and also known as (a/k/a) City of Newport Water Department and the
Kentucky Risk Management Association. The complaint states that on or about October 5, 2000, a water main owned and under the control of the City of Newport and/or the City of Newport d/b/a/
Newport Water Works and a/k/a/ City of Newport Water Department located in and underground at the Newport Shopping Center on Monmouth Street, Newport, Campbell County, Kentucky ruptured. The water in
the main was under pressure and upon the failure of the water main, the pressure, water, sand and gravel provided an environment which resulted in "cutting" a hole in the adjacent gas distribution
main owned by and under the control ofULH&P. The hole that breached the adjacent natural gas main was caused by the abrasive action of the pressurized
stream of water combined with the sand, gravel and dirt flowing directly on the surface of the natural gas main.ULH&Phas incurred total damages in
excess of $3.5 million.

22

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ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

In lieu of special meetings of shareholders ofCG&EandULH&P,
resolutions were duly adopted via unanimous written consents of the respective sole shareholders ofCG&Eand ULH&P.Cinergy
Corp.owns all of the 89,663,086 outstanding shares of common stock, representing a like
number of votes, ofCG&E.CG&Eowns all of the 585,333 outstanding shares of common stock, representing
a like number of votes, ofULH&P. These written resolutions authorized the election of Mr. James L. Turner to the respective boards of directors
ofCG&EandULH&Peffective October 1, 2001. He is to serve as the successor-Director to
Mr. William J. Grealis until the respective 2002 annual meetings of shareholders ofCG&Eand ULH&P. Mr. James E. Rogers and Mr. R.
Foster Duncan continued their directorships on the boards of directors of CG&EandULH&P. Their terms will also expire at the respective 2002
annual meetings of shareholders ofCG&EandULH&P.

23

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Cinergy Corp.'scommon stock is listed on the New York Stock Exchange. The high and low stock prices for each
quarter for the past two years are indicated below:

High

Low2001First Quarter

$
35.15

$
28.81Second Quarter


35.60


32.20Third Quarter


35.00


28.00Fourth Quarter


33.85


28.162000First Quarter

$
25.88

$
20.00Second Quarter


28.13


21.19Third Quarter


33.25


25.56Fourth Quarter


35.25


28.50


Cinergy Corp.holds all outstandingCG&Eand PSIcommon stock, andCG&Eholds allULH&Pcommon stock.
Therefore, no public trading market exists for the common stock ofCG&E,PSI, and ULH&P.

As
of January 31, 2002,Cinergy Corp.had 58,601 common stockholders of record.

Cinergy Corp.declared dividends on its common stock of $.45 per share for each quarter of 2001 and 2000. The quarterly dividends paid to Cinergy Corp.byCG&EandPSI, and to CG&EbyULH&Pfor the past two years were
as follows:

|Registrant |  | Quarter |  | 2001 |        | 2000
|---------- |  | ------- |  | ---- | ------ | ----
|
|CG&E       |  | First   |  | $    | 71,535 |     
|           |  | Second  |  |      | 71,551 |     
|           |  | Third   |  |      | 71,588 |     
|           |  | Fourth  |  |      | 71,595 |     
|PSI        |  | First   |  | $    |       |     
|           |  | Second  |  |      |       |     
|           |  | Third   |  |      |       |     
|           |  | Fourth  |  |      |       |     
|ULH&P      |  | First   |  | $    |       |     
|           |  | Second  |  |      | 4,829  |     
|           |  | Third   |  |      |       |     
|           |  | Fourth  |  |      | 6,878  |     

See
Note 2(b) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data" for a brief description of the registrants' common stock
dividend restrictions.

24

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ITEM 6.    SELECTED FINANCIAL DATA

|                                     |                              | 2001                                 |        | 2000 |      | 1999   |      | 1998 |       | 1997 |     
|------------------------------------ | ---------------------------- | ------------------------------------ | ------ | ---- | ---- | ------ | ---- | ---- | ----- | ---- | ----
|
|Cinergy                              |                              |                                      |        |      |      |        |      |      |       |      |     
|Operating revenues                   |                              | $                                    | 12,923 |      | $    | 8,422  |      | $    | 5,938 |      | $   
|Net income before extraordinary item |                              |                                      | 442    |      |      | 399    |      |      | 404   |      |     
|Net income                           |                              |                                      | 442    |      |      | 399    |      |      | 404   | (1)  |     
|Common stock                         |                              |                                      |        |      |      |        |      |      |       |      |     
|                                     | Earnings per share (EPS)     |                                      |        |      |      |        |      |      |       |      |     
|                                     |                              | Net income before extraordinary item |        |      | 2.78 |        |      | 2.51 |       |      | 2.54
|                                     |                              | Net income                           |        |      | 2.78 |        |      | 2.51 |       |      | 2.54
|                                     | EPSassuming dilution        |                                      |        |      |      |        |      |      |       |      |     
|                                     |                              | Net income before extraordinary item |        |      | 2.75 |        |      | 2.50 |       |      | 2.53
|                                     |                              | Net income                           |        |      | 2.75 |        |      | 2.50 |       |      | 2.53
|                                     | Dividends declared per share |                                      |        | 1.80 |      |        | 1.80 |      |       | 1.80 |     
|Total assets                         |                              |                                      | 12,300 |      |      | 12,330 |      |      | 9,617 |      |     
|Long-term debt                       |                              |                                      | 3,597  |      |      | 2,876  |      |      | 2,989 |      |     
|Long-term debt due within one year   |                              |                                      | 148    |      |      | 41     |      |      | 31    |      |     
|                                     |                              |                                      |        |      |      |        |      |      |       |      |     
|CG&E                                 |                              |                                      |        |      |      |        |      |      |       |      |     
|Operating revenues                   |                              | $                                    | 4,694  |      | $    | 3,230  |      | $    | 2,551 |      | $   
|Net income                           |                              |                                      | 327    |      |      | 267    |      |      | 234   |      |     
|Total assets                         |                              |                                      | 5,360  |      |      | 5,987  |      |      | 4,917 |      |     
|Long-term debt                       |                              |                                      | 1,105  |      |      | 1,205  |      |      | 1,206 |      |     
|Long-term debt due within one year   |                              |                                      | 100    |      |      | 1      |      |      |      |      |     
|                                     |                              |                                      |        |      |      |        |      |      |       |      |     
|PSI                                  |                              |                                      |        |      |      |        |      |      |       |      |     
|Operating revenues                   |                              | $                                    | 4,075  |      | $    | 2,684  |      | $    | 2,136 |      | $   
|Net income                           |                              |                                      | 162    |      |      | 135    |      |      | 117   |      |     
|Total assets                         |                              |                                      | 4,571  |      |      | 4,630  |      |      | 3,835 |      |     
|Long-term debt                       |                              |                                      | 1,325  |      |      | 1,074  |      |      | 1,212 |      |     
|Long-term debt due within one year   |                              |                                      | 23     |      |      | 38     |      |      | 31    |      |     
|                                     |                              |                                      |        |      |      |        |      |      |       |      |     

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25

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS

In this reportCinergy(which includesCinergy Corp.and all of
our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as "we", "our", or "us".

The
following discussion should be read in conjunction with the accompanying financial statements and related notes included elsewhere in this report. The results discussed below are not
necessarily indicative of the results to be expected in any future periods.

INTRODUCTION

In Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), we explain our general operating environment, as well as our
liquidity, capital resources, and results of operations. Specifically, we discuss the following:



LIQUIDITY AND CAPITAL RESOURCES

Comparative Cash Flow Analysis

Cinergy

At December 31, 2001,Cinergy'sconsolidated cash and cash equivalents totaled $111.1 million
compared to $93.1 million at December 31, 2000. The increase reflects increases in cash from operating activities and new financings, offset in part by additional expenditures for our
operating companies' construction programs and additional investments, including peaking generation assets.

The
Cincinnati Gas & Electric Company (CG&E)

At
December 31, 2001,CG&E'sconsolidated cash and cash equivalents totaled $9.1 million compared to $20.6 million at
December 31, 2000. Additional construction expenditures were largely offset by cash from operating activities.

PSI
Energy, Inc. (PSI)

At
December 31, 2001,PSI'sconsolidated cash and cash equivalents totaled $1.6 million as compared to $1.3 million
at December 31, 2000. Increases in cash from operating activities and financing activities were offset by additional construction expenditures.

26

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Operating Activities

For each of the years ended December 31, 2001, 2000, and 1999, our cash flows from operating activities were as follows:

Net Cash Provided by (Used in) Operating Activities

|                                               |  | 2001 |         | 2000 |   | 1999   
|---------------------------------------------- |  | ---- | ------- | ---- | - | -------
|
|Cinergy(1)                                     |  | $    | 694,412 |      | $ | 618,001
|CG&Eand subsidiaries                           |  |      | 333,099 |      |   | 463,875
|PSI                                            |  |      | 388,171 |      |   | 339,115
|The Union Light, Heat and Power Company(ULH&P) |  |      | 46,513  |      |   | 49,258 

---

Cinergy'snet cash provided by operating activities increased during 2001, as compared to 2000, primarily due to increased income and a
net cash inflow from working capital fluctuations.CG&E'snet cash provided by operating activities decreased primarily due to working capital
fluctuations, offset in
part by increased income.PSI'scash from operating activities increased primarily due to increased income.

Cinergy'sandPSI'snet cash provided by operating activities increased during 2000, as
compared to 1999, primarily due to the one-time cash payment in 1999 for the purchase of the remainder of Dynegy Inc.'s 25 year contract for coal gasification services. CG&E'scash
provided by operating activities increased primarily due to increased income and fluctuations in working capital.

The
tariff-based gross margins of our operating companies continue to be the principal source of cash from operating activities. The diversified retail customer mix of residential,
commercial, and industrial classes and a commodity mix of gas and electric service provides a reasonably predictable gross cash flow.

Financing Activities

For each of the years ended December 31, 2001, 2000, and 1999, our cash flows from financing activities were as follows:

Net Cash Provided by (Used in) Financing Activities

|                     |  | 2001 |         | 2000 |   | 1999     |  
|-------------------- |  | ---- | ------- | ---- | - | -------- | -
|
|Cinergy(1)           |  | $    | 866,438 |      | $ | 157,771  |  
|CG&Eand subsidiaries |  |      | 16,841  |      |   | (192,665 | )
|PSI                  |  |      | 34,723  |      |   | (77,955  | )
|ULH&P                |  |      | (14,678 | )    |   | (18,006  | )

---

Cinergy'snet cash provided by financing activities increased during 2001, as compared to 2000, primarily due to the net proceeds from the
issuance ofPreferred trust securitiesand proceeds from debt issuances to fund the purchase of new generating facilities and environmental compliance
expenditures as discussed in the "Investing Activities" section.CG&E'snet cash provided by financing activities increased primarily as the result of
increased short-term borrowings offset by an increase in dividends

27

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paid on common stock.PSI'snet cash provided by financing activities increased primarily as the result of no dividends paid on common stock in 2001
and the retirement of preferred stock in 2000.

Cinergy'snet cash provided by financing activities increased in 2000, as compared to 1999, primarily due to a net increase in
long-term and short-term borrowings.CG&E'snet cash used in financing activities decreased primarily as a result of the
redemption of $164 million in long-term debt that occurred during 1999 partially offset by a decrease in short-term borrowings.PSI'snet cash used in financing activities increased primarily due
to a net reduction in short-term and long-term debt offset in part by fewer debt
redemptions in 2000.

Investing Activities

For each of the years ended December 31, 2001, 2000, and 1999, our cash flows used in investing activities were as follows:

Net Cash Used in Investing Activities

|                     |  | 2001 |            | 2000 |   | 1999     |  
|-------------------- |  | ---- | ---------- | ---- | - | -------- | -
|
|Cinergy(1)           |  | $    | (1,542,837 | )    | $ | (764,637 | )
|CG&Eand subsidiaries |  |      | (361,503   | )    |   | (260,127 | )
|PSI                  |  |      | (422,618   | )    |   | (268,691 | )
|ULH&P                |  |      | (34,196    | )    |   | (28,433  | )

---

Cinergy's,CG&E's, andPSI'snet cash used
in investing activities increased in 2001, as compared to 2000, as a result of an increase in capital expenditures related to environmental compliance projects. See the "Environmental Commitment and
Contingency Issues" section for further information.Cinergy'sincrease also reflects the acquisition of additional peaking capacity including the 480
megawatt (MW) Brownsville and the 550 MW Caledonia peaking stations.

The
increase inCinergy'scash used in investing activities in 2000, as compared to 1999, primarily reflects the impact from proceeds of
$690 million received in 1999 from the sale of our 50% ownership interest in Midlands Electricity plc (Midlands).CG&E'sand PSI'snet cash used
in investing activities increased primarily as a result of an increase in construction expenditures.

28

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Capital Requirements

Actual construction and other committed expenditures for 2001 and forecasted construction and other committed expenditures for the year 2002 and for the
five-year period 2002-2006 (in nominal dollars), including allowance for funds used during construction, are presented in the table below:

Actual Capital and Investment Expenditures and Future Projections

|                     |  |   |       | Forecasted Expenditures
|-------------------- |  | - | ----- | -----------------------
|
|
|
|By Registrant        |  |   |       |                        
|Cinergy(1)           |  | $ | 1,551 |                        
|CG&Eand subsidiaries |  |   | 364   |                        
|PSI                  |  |   | 429   |                        
|ULH&P                |  |   | 34    |                        

---

This
forecast includes an estimate of expenditures in accordance with the companies' plans regarding nitrogen oxide (NOX) emission control standards and other environmental
compliance (excluding implementation of the tentative United States (U.S.) Environmental Protection Agency (EPA) agreement), as discussed in EPA Agreement below.

All
forecasted amounts and the underlying assumptions are subject to risks and uncertainties as disclosed in the "Cautionary Statements Regarding Forward-Looking Information."

Environmental Commitment and Contingency Issues

EPA Agreement

On December 21, 2000,Cinergy,CG&E, and PSIreached an agreement in principle with the EPA, the U.S. Department of Justice, three northeast states, and two environmental groups that could
serve as the basis for a negotiated resolution of Clean Air Act Amendments claims and other related matters brought against coal-fired power plants owned and operated by Cinergy'soperating companies.
The estimated cost for these capital expenditures is expected to be approximately $700 million. These capital
expenditures are in addition to our previously announced commitment to install NOX controls at an estimated cost of approximately $800 million (in nominal dollars) between 2001 and
2005. In 2001, we spent $260 million for NOX and other environmental compliance projects. Forecasted expenditures for NOX and other environmental compliance projects (in
nominal dollars) are approximately $250 million for 2002 and $600 million for the 2002-2006 period. See Note 13 of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data" for a discussion of the EPA Agreement and related environmental issues.

Manufactured Gas Plant (MGP) Sites

In November 1998,PSIentered into a Site Participation and Cost Sharing Agreement with Northern Indiana
Public Service Company and Indiana Gas Company, Inc. related to contamination at MGP sites, whichPSIor its predecessors previously owned. Until
investigation and remediation activities have been completed on the sites, we are unable to reasonably estimate the total costs and impact on our financial position or results of operations. In
relation to the MGP claims,PSIalso filed suit against its general liability insurance carriers. Subsequently,PSIsought a declaratory judgment to
obligate its insurance carriers to (1) defend MGP claims againstPSI, or (2) pay PSI'scosts of defense

29

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and compensatePSIfor its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites.
At the present time,PSIcannot predict the outcome of this litigation. See Note 13(g) of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data" for further information.

Ambient Air Standards

In 1997, the EPA revised the National Ambient Air Quality Standards for ozone and fine particulate matter. Fine particulate matter refers to very small solid or
liquid particles in the air. The EPA has estimated that it will take up to five years to collect sufficient ambient air monitoring data to determine fine particulate matter non-attainment
areas. A fine particulate monitoring network was put in place during 1999 and 2000. Following identification of non-attainment areas, the states will identify the
sources of particulate emissions and develop emission reduction plans. These plans may be state-specific or regional. We currently cannot predict the exact amount and timing of required reductions.

On
May 14, 1999, the U.S. Circuit Court of Appeals for the District of Columbia (Court of Appeals) ruled that the EPA's final rule establishing the new eight-hour
ozone standard and the fine particulate matter standard constituted an invalid delegation of legislative authority. In June 1999, the EPA appealed the decision. On February 27, 2001, the
U.S. Supreme Court (Supreme Court) reversed the Court of Appeals' ruling. However, the Supreme Court invalidated the EPA's implementation procedure for the portion of the case dealing with the
eight-hour ozone standard. The EPA currently is evaluating approaches for implementing the eight-hour ozone standard in accordance with the Supreme Court's opinion. Meanwhile,
the Court of Appeals continues to consider the validity of the eight-hour ozone standard and the fine particulate matter standard, as a number of issues that were raised by the parties
were not addressed in its original opinion invalidating those standards. The parties have filed supplemental briefs on these issues, and further oral argument was held in December 2001. A
decision by the Court of Appeals is expected in the spring of 2002. We currently cannot determine the outcome of this litigation or of future EPA actions in response to the litigation and the effects
on future emissions reduction requirements.

Regional Haze

The EPA published the final regional haze rule on July 1, 1999. This rule established planning and emission reduction timelines for states to use to
improve visibility in national parks throughout the U.S. The ultimate effect of the new regional haze rule could be requirements for (1) newer and cleaner technologies and additional controls
on conventional particulates and (2) reductions in sulfur dioxide (SO2) and NOX emissions from utility sources. If more utility emissions reductions are required, the
compliance cost could be significant. In August 1999, several industry groups (some of which we are a member) filed a challenge to the regional haze rules with the Court of Appeals. Parties
have filed their briefs in this case and oral argument will be held in the first quarter of 2002. In addition, several industry groups (some of which we are a member) have petitioned the Bush
Administration to reconsider its approach to regional haze, including possible modifications to the rule and/or settlement of the lawsuit. We currently cannot determine the outcome or effects of the
EPA's, courts', or states' determinations.

In
July 2001, the EPA proposed guidance to implement portions of the regional haze rule. This guidance recommends that states require widespread installation of scrubbers to
reduce SO2 emissions. Several industry groups (some of which we are a member) commented that the EPA's recommendations exceed the scope of the law and the regional haze recommendations. We
currently cannot determine whether or how the EPA will modify the scope of this guidance, or whether the states in which we operate will adopt the EPA's proposed guidance.

30

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Global Climate

In December 1997, delegates to the United Nations' climate summit in Japan adopted an agreement, the Kyoto Protocol, to address global warming. The Kyoto
Protocol establishes legally binding greenhouse gas emission (man-made pollutants thought to be artificially warming the earth's atmosphere) targets for developed nations. On
November 12, 1998, the U.S. signed the Kyoto Protocol; however, it will not be effective in the U.S. until it is approved by a two-thirds vote of the U.S. Senate, which is currently
deemed unlikely.

In
March 2001, the Bush Administration announced that the U.S. was not interested in ratifying the Kyoto Protocol. Talks resumed without active U.S. participation at the
Conference of the Parties in Bonn, Germany in July 2001, where the parties reached broad political agreement on the major outstanding issues. The Marrakech Accord, concluded at the seventh
Conference of the Parties in November 2001, turned broad principles into a detailed set of rules that more clearly define the operating framework for the instruments and institutions created
under the Kyoto Protocol. The Marrakech Accord set the stage for ratification of the Kyoto Protocol, although the U.S. continues to maintain its position against ratification. Because of a lack of
U.S. support for the Kyoto Protocol or similar legislation, significant uncertainty exists about how and when greenhouse gas emissions reductions will be required. Our plan for managing the potential
risk and uncertainty of regulations relating to climate change includes the following:



Mercury

The EPA's 1997 Mercury Study Report and Utility Report to Congress both conveyed that mercury is not a risk to the average American and expressed uncertainty
about whether reductions in current domestic sources would reduce human mercury exposure. On December 14, 2000, the EPA made a determination that additional regulation of mercury emissions from
coal-fired power plants was appropriate. It is currently developing a Maximum Achievable Control Technology standard for mercury. The EPA is expected to issue draft regulations in 2003 and
final rules by 2004, with reductions required before 2010. We currently cannot predict the outcome or costs relating to the EPA's determination and subsequent regulation.

Other Investing Activities

Our ability to invest in growth initiatives is limited by certain legal and regulatory requirements, including the Public Utility Holding Company Act of 1935, as
amended (PUHCA). The PUHCA limits the types of non-utility businesses in whichCinergyand other registered holding companies under PUHCA
can invest as well as the amount of capital that can be invested in permissible non-utility businesses. Also, the timing and amount of investments in the non-utility businesses
is dependent on the development and favorable evaluations of opportunities. Under the PUHCA restrictions, we are allowed to invest or commit to invest in certain non-utility businesses,
including:





31

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32

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Financing Obligations

The following table presentsCinergy's,PSI's, CG&E's, andULH&P'sfinancing obligations:

|                     |                                                   | Payments Due by Period    
|-------------------- | ------------------------------------------------- | --------------------------
|
|
|
|Cinergy(1)           |                                                   |                           
|                     | Notes payable and other short-term obligations    |                           
|                     | Capital lease obligations                         |                           
|                     | Operating leases                                  |                           
|                     | Long-term debt (including due within one year)    |                           
|                     | Preferred trust securities                        |                           
|                     |                                                   |                           
|                     |                                                   | Total Cinergy             
|                     |                                                   |                           
|CG&Eand subsidiaries |                                                   |                           
|                     | Notes payable and other short-term obligations(6) |                           
|                     | Capital lease obligations                         |                           
|                     | Operating leases                                  |                           
|                     | Long-term debt (including due within one year)    |                           
|                     |                                                   |                           
|                     |                                                   | Total CG&Eand subsidiaries
|                     |                                                   |                           
|PSI                  |                                                   |                           
|                     | Notes payable and other short-term obligations(6) |                           
|                     | Capital lease obligations                         |                           
|                     | Operating leases                                  |                           
|                     | Long-term debt (including due within one year)    |                           
|                     |                                                   |                           
|                     |                                                   | Total PSI                 
|                     |                                                   |                           
|ULH&P                |                                                   |                           
|                     | Notes payable and other short-term obligations(6) |                           
|                     | Capital lease obligations                         |                           
|                     | Operating leases                                  |                           
|                     | Long-term debt                                    |                           
|                     |                                                   |                           
|                     |                                                   | Total ULH&P               
|                     |                                                   |                           

---

33

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Capital Resources

Notes Payable and Other Short-term Obligations

Short-term Borrowings

At December 31, 2001,Cinergy Corp.had $437 million remaining unused and available capacity
relating to its $1.2 billion revolving credit facilities. The revolving credit facilities were comprised of $400 million under a three-year senior revolving credit facility
expiring in May 2004 and $775 million in revolving facilities expiring during the first half of 2002. In early 2002,Cinergy Corp.placed
a $600 million, 364-day senior revolving credit facility to replace the facilities expiring in 2002. At December 31, 2001, certain of our non-regulated
subsidiaries had $8 million of unused and available revolving credit lines.

In
May 2001,CG&Efiled an application with the Public Utilities Commission of Ohio (PUCO) to increase its short-term
debt authority to $600 million and in June 2001, the PUCO granted this request. In April 2001,Cinergy Corp.filed an application
with the SEC to increasePSI'sandULH&P'sshort-term debt authority to $600 million
and $65 million, respectively. In August 2001, the SEC granted our request. As of December 31, 2001, our operating companies had regulatory authority to borrow up to a total of
$1.27 billion in short-term debt ($671 million forCG&Eand its subsidiaries, including
$65 million forULH&P, and $600 million forPSI.) As of December 31, 2001, CG&Eand
its subsidiaries had $226 million (including $39 million forULH&P) unused and
available andPSIhad $557 million unused and available under their respective regulatory authority.

Our
short-term financial arrangements include customary default provisions that could impact the continued availability of credit or result in the acceleration of repayment.
These events include bankruptcy, defaults in payment of other indebtedness, judgments againstCinergythat are not paid or insured, or failure to meet
or maintain covenants.

Uncommitted Lines

In addition to revolving credit facilities,Cinergy,CG&E, and PSIalso maintain uncommitted lines of credit. These facilities are not firm sources of capital and represent an informal agreement to lend money,
subject to availability, with pricing to be determined at the time of advance. At December 31, 2001,Cinergy Corp.'s$40 million
uncommitted line andCG&E's$15 million uncommitted line were unused.PSI'suncommitted line of
$60 million was fully drawn at year-end.

Commercial Paper

In early 2001,Cinergy Corp.expanded the commercial paper program to a maximum outstanding principal amount of
$800 million and reduced the established lines of credit atCG&EandPSI. The expansion of the
commercial paper program at theCinergy Corp.level will, in part, support the short-term borrowing needs ofCG&EandPSIand will eliminate the need for separate commercial paper programs. As of December 31, 2001,Cinergy Corp.'scommercial paper program was supported by $1.2 billion in revolving credit facilities, of which it had $125 million in
commercial paper outstanding.

Variable Rate Pollution Control Notes

CG&EandPSIhave issued variable rate pollution control notes
(tax-exempt notes obtained to finance equipment or land development for pollution control purposes). Because the holders of a

34

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majority of these notes have the right to redeem their notes on any business day, with the remainder being redeemable annually, they are reflected inNotes payable and other
short-term obligationsin the Balance Sheets forCinergy,CG&E, and PSI. At
December 31, 2001,CG&Ehad $196 million andPSIhad $83 million outstanding in pollution control notes, classified as short-term debt.

Money Pool

Cinergy Corp., Cinergy Services, Inc. (Services), and our operating companies participate in a money pool
arrangement to better manage cash and working capital requirements. Under this arrangement, those companies with surplus short-term funds provide short-term loans to affiliates
(other thanCinergy Corp.) participating under this arrangement. This surplus cash may be from internal or external sources. The amounts outstanding
under this money pool arrangement are shown asNotes receivable from affiliated companiesorNotes payable to affiliated
companieson the Balance Sheets forCG&E,PSI, and ULH&P.

Capital Leases

Our operating companies are able to enter into capital leases subject to the authorization limitations of the applicable state utility commissions. Increases in
these limits are subject to the approval of the respective commissions. As of December 31, 2001, unused capital lease authority was $74 million forCG&Eand $19 million forULH&P.PSIdid not have any remaining authority at
December 31, 2001. During the first quarter of 2002,PSIintends to file an application with the Indiana Utility Regulatory Commission (IURC)
requesting additional capital lease authority of up to $100 million. See Note 8(b) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data" for
additional information regarding capital leases.

Operating Leases

We have entered into operating lease agreements for various facilities and properties such as computer, communication and transportation equipment, and office
space. See Note 8(a) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data" for additional information regarding operating leases.

Long-term Debt

We are required to secure authority to issue long-term debt from the SEC under the PUHCA and the state utility commissions of Ohio, Kentucky, and
Indiana. The SEC under the PUHCA regulates the issuance of long-term debt byCinergy Corp.The respective state utility commissions regulate
the issuance of long-term debt by our operating companies. In June 2000, the SEC issued an order under the PUHCA authorizingCinergy
Corp., over a five-year period expiring in June 2005, to increase its total capitalization based on a balance at December 31, 1999 (excluding retained
earnings and accumulated other comprehensive income (loss)) by an additional $5 billion, through the issuance of any combination of equity and debt securities. This increased authorization is
subject to certain conditions, including, among others, that common equity comprises at least 30% ofCinergy Corp.'sconsolidated capital
structure and thatCinergy Corp., under certain circumstances, maintains an investment grade rating on its senior debt obligations.

In
May 2001,CG&Efiled an application with the PUCO to increase its long-term debt authority to $400 million
and in June 2001, the PUCO granted this request. As of December 31, 2001, $400 million remained unused and available under the PUCO authorization.PSIintends to file an application with
the IURC requesting additional long-term debt issuance authority of up to $500 million. In November 2001, Cinergy Corp.filed a shelf registration statement with the SEC with respect to the
issuance of common stock, preferred stock, and other securities with
an aggregate

35

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amount of $800 million, and at December 31, 2001, $168 million remained unused and available under this registration statement. We may, at any time, seek to issue additional
long-term debt, subject to regulatory approval.

As
of December 31, 2001, through shelf registration statements filed with the SEC under the Securities Act of 1933, as amended, we could issue the following amounts of debt
securities:

CG&E

PSI

ULH&P(in millions)First Mortgage Bonds and Other Secured Notes

$
300

$
205

$
20Senior or Junior Unsecured Debt


50


400


30


Off-Balance Sheet Financing

Cinergyuses special-purpose entities (SPEs) from time to time to facilitate financing of various projects. Due to
our lack of control of these entities, a substantive investment by unrelated parties, and
various other criteria,Cinergydoes not consolidate these SPEs. The following describes the major off-balance sheet financings.



Cinergy Capital & Trading, Inc. (Capital & Trading) is a 10% owner of two SPEs that were created to facilitate power sales to Central Maine
Power (CMP). The SPEs raised capital to purchase CMP's existing power supply contracts from two independent power producers. The SPEs restructured the terms of the agreements, resulting in power sales
contracts for approximately 45 MW, ending in 2009, and 35 MW, ending in 2016. Since the SPEs have no generation sources, power purchase agreements were entered into with Capital & Trading with
near equivalent terms. The total debt outstanding at December 31, 2001, within these two SPEs is approximately $250 million. This debt is non-recourse to Cinergyand Capital & Trading
in the event of non-performance by CMP. A portion of the cash flows received by the SPEs from CMP is
reserved to pay the interest and principal on the debt.

Capital &
Trading provides various services, including certain credit support facilities. All but one of these credit support facilities is capped at immaterial amounts. The
non-capped facility can only be called upon in the event the SPE breaches representations, violates covenants, or other unlikely events.

Capital &
Trading accounts for its 10% interest in both SPEs under the equity method of accounting.



Cinergyhas an arrangement with an SPE that has contracted to buy five combustion turbines from an unrelated
party.Cinergywill act as agent for the SPE in all turbine-related matters. Progress payments are being made by the SPE as the turbines are
constructed, with estimated completion in 2003 for two of the turbines and 2004 for the remaining three. Total cost of the turbines being constructed, including interest during construction, is
estimated at $185 million. The arrangement with the SPE allowsCinergyto elect any of the following at construction completion:
(a) purchase the turbines for the total costs incurred by the SPE, (b) enter into a five-year operating lease, or (c) remarket the turbines with the proceeds
distributed first to the debt holders and then to the equity holders of the SPE. ShouldCinergyelect to remarket the turbines on behalf of the owners
of the SPE, we are required to pay up to 89.9% of the turbine costs (including interest) to the SPE for use in payment of outstanding senior debt. The proceeds from the sales of turbines would then be
used to recover the remaining turbine cost, with any residuals returned toCinergy. During the construction period,Cinergyhas agreed to indemnify the SPE
for 89.9% of the construction cost of the turbines in

36

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an event of default underCinergy'sagency agreement. At December 31, 2001, approximately $30 million of progress payments had been made
by the SPE. Neither the turbines nor any related debt is reflected in the financial statements because we have no ownership in, nor control of, the SPE.Cinergyis uncertain whether it will exercise the
purchase option or enter into the five-year operating lease at the completion of construction.



CG&E,PSI, andULH&Phave an
agreement to sell, on a revolving basis, undivided interests in certain accounts receivable. At December 31, 2001, approximately $322 million of
receivables were sold. Cash proceeds from these sales, net of a purchaser holdback of approximately 20%, were $257 million. For a more detailed discussion of our sales of accounts receivable,
see Note 7 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".

In
addition to the items above,Cinergyholds investments in various unconsolidated subsidiaries which are accounted for under the equity
method (see Note 1(b) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data").Cinergyhas guaranteed
approximately $12 million of the debt of these entities.

Securities Ratings

As of January 31, 2002, the major credit ratings agencies rated our securities as follows:

|              |                            | Fitch |           | Moody's(1) |      | S&P(2)
|------------- | -------------------------- | ----- | --------- | ---------- | ---- | ------
|Cinergy Corp. |                            |       |           |            |      |       
|              | Corporate Credit           |       | BBB+      |            | Baa2 |       
|              | Senior Unsecured Debt      |       | BBB+      |            | Baa2 |       
|              | Commercial Paper           |       | F-2       |            | P-2  |       
|              | Preferred Trust Securities |       | BBB+      |            | Baa2 |       
|CG&E          |                            |       |           |            |      |       
|              | Senior Secured Debt        |       | A-        |            | A3   |       
|              | Senior Unsecured Debt      |       | BBB+      |            | Baa1 |       
|              | Junior Unsecured Debt      |       | BBB       |            | Baa2 |       
|              | Preferred Stock            |       | BBB       |            | Baa3 |       
|              | Commercial Paper           |       | F-2       |            | P-2  |       
|PSI           |                            |       |           |            |      |       
|              | Senior Secured Debt        |       | A-        |            | A3   |       
|              | Senior Unsecured Debt      |       | BBB+      |            | Baa1 |       
|              | Junior Unsecured Debt      |       | BBB       |            | Baa2 |       
|              | Preferred Stock            |       | BBB       |            | Baa3 |       
|              | Commercial Paper           |       | F-2       |            | P-2  |       
|ULH&P         |                            |       |           |            |      |       
|              | Senior Unsecured Debt      |       | Not Rated |            | Baa1 |       

---

On
December 12, 2000, S&P placed its ratings ofCinergy Corp.and its operating affiliates,CG&EandPSI, on CreditWatch with negative implications. On January 22, 2001, Moody's announced it had assigned negative
outlooks to the debt and preferred stock securities ofCinergy Corp.and all of its

37

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subsidiaries. These actions were primarily in response toCinergy'sacquisition of the Brownsville and Caledonia power plants. See
"Supply-side Actions" under "Electric Industry" for further discussion. Other items of concern included (1) the announcement thatCinergy
Corp.,CG&E, andPSIhave reached an agreement in principle with the EPA;
(2) the continuing uncertainty surroundingCG&E'spost-deregulation corporate and financial structure; (3) the absence of
restructuring legislation and stranded investment resolution in Indiana; and (4)Cinergy'semphasis on higher-risk
non-regulated activities.

On
September 4, 2001, Moody's placed the debt ratings ofCinergy Corp.on review for possible downgrade. These actions are
primarily in response toCinergy Corp.'sincreased debt associated with its growing portfolio of peaking generation.

On
November 14, 2001, Fitch changed the outlook ofCinergy's'BBB+' Senior unsecured debt to negative from stable due to increased
leverage and planned environmental expenditures.

These
securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating.

Equity Securities

In addition to the authority to issue common stock pursuant to the SEC's June 2000 Order permittingCinergy Corp.to increase its
total capitalization by $5 billion (as previously discussed),Cinergy Corp.may issue an additional
50 million shares of common stock for various stock-based plans, of which approximately 6 million shares had been issued as of December 31, 2001. We also have the option of
purchasing shares of common stock on the open market to satisfy the obligations of our various stock-based plans. The proceeds from any new issuances will be used for general corporate purposes.

In
November 2001,Cinergy Corp.chose to reinstitute the practice of issuing newCinergy Corp.common shares to meet its obligations under the various
employee stock plans and theCinergy Corp.Direct Stock Purchase and
Dividend Reinvestment Plan. This replaces the previous practice of purchasing open market shares to fulfill plan obligations.

The
following table reflects the number of newly issued shares and purchased shares used to satisfy obligations under our various stock-based plans:

2001

2000

1999(in thousands)Purchased Shares

820

2,299

748Issued Shares

508

77

291


See
Note 2(a) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data" for additional information on issued shares.

In
November 2001,Cinergyfiled a shelf registration statement with the SEC with respect to the issuance of common stock, preferred
stock, and other securities with an aggregate amount of $800 million. In December 2001,Cinergyissued approximately $316 million
notional amount of combined securities, a component of which was stock purchase contracts. These contracts obligate the holder to purchase common shares ofCinergy Corp.on or before February 2005.
See Note 4 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data" for additional information
regarding the stock purchase contracts.

Dividend Restrictions

Cinergy Corp.'sability to pay dividends to holders of its common stock is principally dependent on the ability of CG&EandPSIto payCinergy Corp.common dividends. Cinergy Corp.,CG&E, andPSI

38

---

cannot pay dividends on their common stock if preferred stock dividends or preferred trust dividends are in arrears. The amount of common stock dividends that each company can pay is also limited by
certain capitalization and earnings requirements underCG&E'sandPSI'scredit instruments. Currently,
these requirements do not impact the ability of either company to pay dividends on its common stock.

Guarantees

We are subject to an SEC order under the PUHCA, which limits the amountsCinergy Corp.can have outstanding under
guarantees at any one time to $2 billion. As of December 31, 2001, we had $558 million outstanding under the guarantees issued, of which approximately 70% represents guarantees of
obligations reflected onCinergy'sConsolidated Balance Sheet. The amount outstanding representsCinergy Corp.'sguarantees of liabilities and commitments
of its consolidated subsidiaries, unconsolidated subsidiaries, and joint ventures. See Note 13(b) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data" for a further discussion of guarantees.

Collateral Requirements

Cinergyhas certain contracts in place, primarily with trading counterparties, that require the issuance of
collateral in the event our debt ratings are downgraded below investment grade. Based upon our December 31, 2001 trading portfolio, if such an event were to occur, Cinergywould be required to
issue up to approximately $30 million in collateral related to its gas trading operations.

Other

Where subject to rate regulations, our operating companies have the ability to timely recover certain cash outlays through regulatory mechanisms such as fuel
adjustment clause, purchased power tracker, gas cost recovery, and construction work in progress (CWIP) ratemaking. For further discussion see "Electric Industry" and "Gas Industry".

We
are exploring opportunities to monetize certain non-core investments, which would include our international and renewable assets operated by Cinergy Global
Resources, Inc. (Global Resources) and other technology investments. In that regard, management believes that the effects of potential asset dispositions will not result in material gains or
losses or be material to our results of operations.

2001 RESULTS OF OPERATIONSHISTORICAL

SUMMARY OF RESULTS

Electric and gas gross margins and net income forCinergy,CG&E,
andPSIfor the years ended December 31, 2001 and 2000 were as follows:

|                      |  | Cinergy(1) |           | CG&E and subsidiaries |   | PSI      
|--------------------- |  | ---------- | --------- | --------------------- | - | ---------
|
|
|Electric gross margin |  | $          | 2,270,274 |                       | $ | 2,229,869
|Gas gross margin      |  |            | 231,017   |                       |   | 267,304  
|Net income            |  |            | 442,279   |                       |   | 399,466  

---

Diluted earnings per share (diluted EPS) for the year ended December 31, 2001, was $2.75 as compared to $2.50 for the year ended
December 31, 2000. Included in 2000 results were previously reported one-time charges totaling $.11 per share related to a tentative agreement reached with the EPA and a limited
early retirement program (LERP) offered to employees during 2000.

39

---



The increase in 2001 earnings was primarily attributable to increased electric gross margins within Energy Merchant Business Unit's (Energy Merchant) origination, marketing and trading
segment, and reduced operating expenditures. Partially offsetting this increase were lower electric gross margins within our regulated operations, mainly driven by mild weather and a slowed economy,
and increased depreciation and interest expenses associated with new investments. Gas gross margins decreased for the year ended December 31, 2001, as compared to the same period last year,
primarily as a result of mild weather.

The
explanations below follow the line items on the Statements of Income forCinergy, CG&E, andPSI. However,
 only the line items that varied significantly from prior periods are discussed.

ELECTRIC OPERATING REVENUES

|               |       | Cinergy(1) |       | CG&E and subsidiaries |   | PSI   |      
|-------------- | ----- | ---------- | ----- | --------------------- | - | ----- | -----
|
|
|Retail         |       | $          | 2,691 |                       | $ | 2,692 |      
|Wholesale      |       |            | 5,432 |                       |   | 2,640 |      
|Transportation |       |            | 3     |                       |   |      |      
|Other          |       |            | 55    |                       |   | 52    |      
|               |       |            |       |                       |   |       |      
|               | Total |            | $     | 8,181                 |   | $     | 5,384
|               |       |            |       |                       |   |       |      

---

Electric operating revenuesforCinergy, CG&E, andPSIincreased for the year ended December 31, 2001, as compared to the same period last
year, mainly due to an increase in volumes and average price per megawatt-hour (MWh) realized on non-firm wholesale transactions related to energy marketing and trading
activities. Non-firm power is power without a guaranteed commitment for physical delivery.

GAS OPERATING REVENUES

Cinergy(1)

CG&E and subsidiaries2001

2000

% Change

2001

2000

% Change(in millions)Retail

$
547

$
429

28

$
547

$
429

28Wholesale


4,071


2,454

66


3


1

Transportation


40


56

(29
)

40


56

(29
)Other


5


3

67


6


5

20Total

$
4,663

$
2,942

58

$
596

$
491

21


---

Gas operating revenuesforCinergyand CG&Eincreased for the year ended December 31, 2001, as compared to the
same period last year. Cinergy'sincrease was primarily the result of increased volumes sold by Cinergy Marketing & Trading, LP (Marketing & Trading).

CG&E'sretail gas revenues increased primarily due to a higher price received per thousand cubic feet (mcf) sold. This increase was
partially offset by a decrease in retail gas sales resulting from warmer weather during the fourth quarter of 2001. The higher price reflects a substantial increase in the wholesale gas commodity cost
during the first six months, which is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism that is mandated by state law. Retail sales
also

40

---

increased and transportation sales decreased due to transportation customers (customers who purchase gas directly from other suppliers) returning to full gas service (customers who purchase gas and
utilize the transportation services ofCG&E).

OPERATING EXPENSES

|                              |       | Cinergy(1) |       | CG&E and subsidiaries |   | PSI   |      
|----------------------------- | ----- | ---------- | ----- | --------------------- | - | ----- | -----
|
|
|Fuel                          |       | $          | 771   |                       | $ | 773   |      
|Purchased and exchanged power |       |            | 5,140 |                       |   | 2,382 |      
|Gas purchased                 |       |            | 4,432 |                       |   | 2,674 |      
|Operation and maintenance     |       |            | 1,032 |                       |   | 1,119 |      
|Depreciation                  |       |            | 378   |                       |   | 344   |      
|Taxes other than income taxes |       |            | 228   |                       |   | 268   |      
|                              |       |            |       |                       |   |       |      
|                              | Total |            | $     | 11,981                |   | $     | 7,560

---

Fuel

Fuelrepresents the cost of coal, natural gas, and oil that is used to generate electricity. The following table
details the changes to fuel expense from the year ended December 31, 2000, to the year ended December 31, 2001:

Cinergy(1)

CG&E

PSI(in millions)2000 fuel expense

$
773

$
344

$
407Increase (Decrease) due to changes in:Price of fuel


47


22


25Deferred fuel cost


45


2


43MWh generation


(58
)

(36
)

(22
)Other(2)


(36
)

(25
)

2001 fuel expense

$
771

$
307

$
453


---

Purchased and Exchanged Power

Purchased and exchanged powerexpense forCinergy, CG&E, andPSIincreased for the year ended December 31, 2001, as compared to the same period last
year, primarily due to an increase in purchases of non-firm wholesale power, reflecting higher sales volumes and higher prices paid per MWh.

Gas Purchased

Gas purchasedexpense forCinergyincreased for the year ended
December 31, 2001, as compared to the same period last year, primarily due to an increase in gas commodity trading volumes.CG&E's

41

---

expense increased for the year ended December 31, 2001, as compared to the same period last year, primarily due to higher prices paid per mcf during the first six months of 2001. CG&E'swholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery
mechanism that is mandated by state law.

Operation and Maintenance

Operation and maintenanceexpense forCinergy, CG&E, andPSIdecreased for the year ended December 31, 2001, as compared to the same period last
year, due in part to one-time charges related to a tentative agreement reached with the EPA in late 2000 and the LERP offered during 2000, as part of a corporate restructuring initiative. Cinergy'sandCG&E'sdecrease is also attributable to a sale of emission allowances, due to decreased
electric generation, andCinergy'sandPSI'sdecrease reflects the reduction in amortization of
demand-side management costs, resulting from the expiration of the agreement in May 2000.

Depreciation

Depreciationexpense forCinergyincreased for the year ended
December 31, 2001, as compared to the same period last year. This increase was primarily attributable to the acquisition of additional depreciable plant, including investments in peaking
generation.

Taxes Other Than Income Taxes

Taxes other than income taxesexpense forCinergy, CG&E, andPSIdecreased for the year ended December 31, 2001, as compared to the same period last
year, primarily due to reduced property tax expense and other tax changes associated with deregulation in Ohio.

MISCELLANEOUSNET

MiscellaneousnetforPSIincreased $15 million
for the year ended December 31, 2001, as compared to the same period last year, primarily due to income associated with capitalized financing costs of its pollution control projects and gains
associated with the demutualization of one of our medical insurance carriers.

INTEREST

Interestexpense forCinergyincreased $44 million for the
year ended December 31, 2001, as compared to the same period last year, mainly due to debt issuances principally associated with the acquisition of additional peaking generation. Partially
offsetting this increase was a decrease in short-term interest rates.

INCOME TAXES

Income taxexpense forCinergy, CG&E,
andPSIincreased $4 million, $27 million and $18 million, respectively for
the year ended December 31, 2001, as compared to the same period last year, primarily due to an increase in taxable income.

ULH&P

The Results of Operations discussion forULH&Pis presented only for the year ended December 31, 2001, in
accordance with General Instruction I(2)(a).

42

---

Electric
and gas margins and net income forULH&Pfor the year ended December 31, 2001 and 2000, were as follows:

ULH&P2001

2000(in thousands)Electric gross margin

$
79,398

$
65,686Gas gross margin


36,740


40,359Net income


35,924


24,632


Electric gross marginsincreased for the year ended December 31, 2001, as compared to the same period last year, primarily due to
the recognition of revenues previously reserved as they were subject to refund. These revenues were recorded in connection with a 2000 retail rate filing with the Kentucky Public Service Company
(KPSC). A settlement agreement was reached with the KPSC in May 2001, which grantedULH&Pretention of these revenues. For further information
regarding the settlement agreement, see Note 13(j) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".

Gas gross marginsdecreased for the year ended December 31, 2001, as compared to the same period last year, as a result of milder
weather and reduced industrial consumption.

The
Results of Operations discussions forCinergy,CG&E, and PSIare combined within this section.

2000 RESULTS OF OPERATIONSHISTORICAL

SUMMARY OF RESULTS

Electric and gas margins and net income forCinergy,CG&E, and PSIfor the years ended December 31, 2000 and 1999, were as follows:

|                      |  | Cinergy(1) |           | CG&E and subsidiaries |   | PSI      
|--------------------- |  | ---------- | --------- | --------------------- | - | ---------
|
|
|Electric gross margin |  | $          | 2,229,869 |                       | $ | 2,052,602
|Gas gross margin      |  |            | 267,304   |                       |   | 212,153  
|Net income            |  |            | 399,466   |                       |   | 403,641  

---

Our diluted EPS for the year ended December 31, 2000, was $2.50, as compared to $2.53 for the year ended December 31, 1999, mainly
due to a decrease in contributions from our international operations, offset by increased earnings in our regulated business.

The
contribution to earnings of our international operations decreased $.70 per share for the year ended December 31, 2000, as compared to 1999, primarily due to the loss of
equity earnings and resulting gain from the sale of our share of Midlands, which took place in July 1999. For further details regarding this transaction, refer to Note 11 of the "Notes
to Financial Statements" in "Item 8. Financial Statements and Supplementary Data". Earnings from our regulated operations had a net increase of $.66 per share for the year 2000, as compared to 1999.
This increase was primarily attributable to
growth in electric margins and continued improvement in our commodity supply business. Growth in residential, commercial, and industrial customer bases, along with improvements in cost of sales, were
somewhat offset by the effects of mild weather experienced during 2000.

43

---

Partially
offsetting the overall increase in regulated operations were one-time charges totaling $.11 per share related to a tentative agreement with the EPA and the LERP
offered in 2000 as part of a corporate restructuring initiative.

The
explanations below follow the line items on the Statements of Income forCinergy, CG&E, andPSI. However,
 only the line items that varied significantly from prior periods are discussed.

ELECTRIC OPERATING REVENUES

|          |       | Cinergy(1) |       | CG&E and subsidiaries |   | PSI   |      
|--------- | ----- | ---------- | ----- | --------------------- | - | ----- | -----
|
|
|Retail    |       | $          | 2,692 |                       | $ | 2,725 |      
|Wholesale |       |            | 2,640 |                       |   | 1,539 |      
|Other     |       |            | 52    |                       |   | 49    |      
|          |       |            |       |                       |   |       |      
|          | Total |            | $     | 5,384                 |   | $     | 4,313

---

Electric operating revenuesforCinergy, CG&E, andPSIincreased for the year ended December 31, 2000, as compared to 1999, mainly due to
an increase in volumes and the average price per MWh realized on non-firm wholesale transactions related to energy marketing and trading activities.

The
increase in other electric operating revenues forCinergyprimarily reflected marketing activities of Capital & Trading, a Cinergynon-regulated
affiliate.

GAS OPERATING REVENUES

|               |       | Cinergy(1) |       | CG&E and subsidiaries
|-------------- | ----- | ---------- | ----- | ---------------------
|
|
|Retail         |       | $          | 429   |                      
|Wholesale      |       |            | 2,454 |                      
|Transportation |       |            | 56    |                      
|Other          |       |            | 3     |                      
|               |       |            |       |                      
|               | Total |            | $     | 2,942                

---

Gas operating revenuesforCinergyincreased in 2000, as compared to 1999, primarily as a
result of a higher price realized per mcf sold by Marketing & Trading.

CG&E'sretail gas revenues increased primarily due to a higher price realized per mcf sold. Transportation revenues increased due to the
continued trend of full-service customers (customers who purchase gas and utilize the transportation services ofCG&E) purchasing gas
directly from other suppliers.

The
market price of natural gas increased significantly in 2000, which causedCG&Eto pay more for the gas it delivered to customers. The
wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism that is mandated by state law.

OTHER REVENUES

Other operating revenuesforCinergyincreased $67 million
for 2000, as compared to 1999, primarily due to revenues resulting from the acquisition of an energy-related services affiliate in late 1999.

44

---

OPERATING EXPENSES

|                              |       | Cinergy(1) |       | CG&E and subsidiaries |   | PSI  
|----------------------------- | ----- | ---------- | ----- | --------------------- | - | -----
|
|
|Fuel                          |       | $          | 773   |                       | $ | 761  
|Purchased and exchanged power |       |            | 2,382 |                       |   | 1,499
|Gas purchased                 |       |            | 2,674 |                       |   | 1,384
|Operation and maintenance     |       |            | 1,119 |                       |   | 1,012
|Depreciation                  |       |            | 344   |                       |   | 323  
|Taxes other than income taxes |       |            | 268   |                       |   | 266  
|                              |       |            |       |                       |   |      
|                              | Total |            | $     | 7,560                 |   | $    

---

Fuel

Fuelrepresents the cost of coal, natural gas, and oil that is used to generate electricity. The following table
details the changes to fuel expense from 1999 to 2000:

Cinergy(1)

CG&E

PSI(in millions)1999 fuel expense

$
761

$
341

$
397Increase (Decrease) due to changes in:Price of fuel


(14
)

(12
)

(2
)Deferred fuel cost


(17
)

9


(26
)MWh generation


44


6


38Other


(1
)




2000 fuel expense

$
773

$
344

$
407


---

Purchased and Exchanged Power

Purchased and exchanged powerexpense increased forCinergy, CG&E, andPSIfor 2000, as compared to 1999. This increase was primarily due to an increase in purchases
of non-firm wholesale power as a result of an increase in sales volumes from Marketing & Trading.

Gas Purchased

Gas purchasedexpense increased forCinergyin 2000, as compared
to 1999, primarily due to increased gas commodity trading activity and, for bothCinergyandCG&E, an
increase in the average cost per mcf of gas purchased.

45

---



Operation and Maintenance

Cinergy'sOperation and maintenanceexpense increased in 2000, as compared to 1999,
primarily due to a full year's realization of operating expenses resulting from the acquisition of an energy-related services affiliate in late 1999. Additionally for 2000, operation expenses
increased forCinergy,CG&E, andPSIas a result of
one-time charges related to a tentative agreement reached with the EPA and the LERP offered as part of a corporate restructuring initiative.

Depreciation

Cinergy's,CG&E's, andPSI'sDepreciationexpense increased in 2000, as compared to 1999, due to additions to depreciable plant.

EQUITY IN EARNINGS (LOSSES) OF UNCONSOLIDATED SUBSIDIARIES

Cinergy'sEquity in earnings (losses) of unconsolidated subsidiariesdecreased
$53 million in 2000, as compared to 1999. This decrease was primarily due to the loss in earnings resulting from the July 1999 sale of our 50% ownership interest in Midlands. For further
information see Note 11 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".

INTEREST

PSI'sInterestexpense decreased $8 million in 2000, as compared to 1999. This
decrease was primarily due toPSI'snet redemption of approximately $130 million of long-term debt during the year, which was
slightly offset by an increase in average short-term interest rates.

FUTURE EXPECTATIONS/TRENDS

In the "Future Expectations/Trends" section, we discuss electric and gas industry developments, market risk sensitive instruments and positions, inflation,
accounting changes, and insurance. Each of these discussions will address the current status and potential future impact on our results of operations and financial condition.

ELECTRIC INDUSTRY

The utility industry has traditionally operated as a regulated monopoly but is transitioning to an environment of increased wholesale and retail competition.
Regulatory and legislative decisions being made at the federal and state levels are aimed at promoting customer choice and are shaping this transition. Customer choice provides the customer the
ability to select an energy supplier (the company that generates or supplies the commodity) in an open and competitive marketplace. This emerging environment presents significant challenges, which are
discussed below.

Wholesale Market Developments

In 1996, the FERC issued orders to open the wholesale electric markets to competition. Competitors within the wholesale market include both utilities and
non-utilities such as EWG's, independent power producers, and power marketers. We are involved in wholesale power marketing and trading and exempt wholesale generation through Energy
Merchant.

In
both 1998 and 1999, the Midwest wholesale electric power markets experienced record price spikes. These spikes were caused by a number of factors including unseasonably hot weather,
unplanned generating unit outages, transmission constraints, and increased electric commodity market volatility. These simultaneous events created temporary but extreme prices in the Midwest
electricity markets. In response to these events, we have aggressively adopted a model that is focused on a balance of supply and demand.

46

---

Supply-side Actions

In September 1999, Capital & Trading formed a partnership (each party having a 50% ownership) with Duke Energy North America, LLC (Duke), to
increase the available generating capacity for use during peak demand periods. The partnership was formed for the purpose of jointly constructing and owning three wholesale generating facilities.

In
March 2000, the IURC issued an order, requiring the partnership to immediately suspend all construction activities at the site located in Henry County, Indiana (a peaking plant
with a total capacity of 129 MW of which we owned 65 MW). In making this decision, the IURC found that it needed additional information related to the project before issuing a final decision. The
issues raised were air quality, water supply, noise control, landscaping, plant abandonment, and emergency services training. The IURC held a hearing on this matter in November 2000, and a
favorable ruling was received in April 2001. The plant, which began generating power commercially in the summer of 2001, consists of three gas turbine engines.

In
June 2001, Capital & Trading and Duke announced they would dissolve their partnership. In September 2001, the partnership was dissolved and Capital &
Trading obtained 100% ownership of the 680 MW wholesale generating facility located in Butler County, Ohio and the 129 MW wholesale generating facility located in Henry County, Indiana. In exchange
for the Butler County, Ohio and Henry County, Indiana generating facilities, Duke received 100% ownership of the Vermillion County, Indiana generating facility (680 MW), which will be operated by Cinergyfor five years.

In
March 2001, Capital & Trading completed the acquisition of the 480 MW Brownsville generation facility located in Haywood County, Tennessee and the 550 MW Caledonia
generation facility located in Lowndes County, Mississippi. Brownsville has four natural gas-fired combustion turbines and Caledonia has six natural gas-fired combustion
turbines.

In
December 2001, the IURC approvedPSI'splan for environmental improvements that will increase the electric generating capacity
at its Noblesville generating station from 100 MW to 300 MW. In addition to increasing capacity, upon completion of the project, overall emissions to the environment will be reduced.

Demand-side Actions

Pursuant to Ohio's customer choice legislation enacted in 2001, 20% ofCG&E'sretail electric load is expected to
switch suppliers by December 2003.CG&Ecurrently has no plans to replace these customers by acquiring new retail customers, although CG&Ereserves the flexibility to replace load in the wholesale market to the extent it chooses. For a further discussion on Ohio deregulation, see
"Retail Market Developments" of this section.

FERC Notice of Proposed Rulemaking

On September 27, 2001, the FERC issued a Notice of Proposed Rulemaking, proposing to promulgate new standards of conduct regulations that would apply
uniformly to natural gas pipelines and
transmitting public utilities that are currently subject to FERC's standards of conduct. The FERC is proposing to adopt one set of standards of conduct to govern the relationships between regulated
transmission providers and all their energy affiliates, broadening the definition of an affiliate covered by the standards of conduct, from the more narrow definition in the existing regulations. At
this time, we are unable to predict either the outcome of this proceeding or its effect onCinergy.

Retail Market Developments

Currently, regulatory and legislative initiatives shaping the transition to a competitive retail market are the responsibilities of the individual states. Many
states, including Ohio, have enacted electric utility

47

---

deregulation legislation. In general, these initiatives have sought to separate the electric utility service into its basic components (generation, transmission, and distribution) and offer each
component separately for sale. This separation is referred to as unbundling of the integrated services. Under the customer choice initiatives in Ohio, we continue to transmit and distribute
electricity; however, the customer can purchase electricity from any available supplier and we are compensated by a "wires" charge. The following sections further discuss the current status of federal
energy policies and deregulation legislation in the states of Ohio, Indiana, and Kentucky, each of which includes a portion of our service territory.

Federal Update

President Bush has indicated that legislation addressing the energy security needs of America deserves prompt consideration. He appointed Vice President Cheney to
head an inter-agency task force which recommended a number of actions, many of which are embodied in HR 4, which passed the House of Representatives last summer. This legislation includes a number of
tax provisions, research and development provisions for clean coal technology, and provisions to increase supplies of natural gas.

Legislation
considering many of the President's recommendations has also been developed by Senator Bingaman and other Senate leaders and is scheduled to be considered by the full Senate
in February 2002.

The
President also recognized the need to balance the energy and environmental needs of the country and supported combining the multitude of environmental regulations facing electric
utilities into one legislative package. The intent is to give the industry one clear set of environmental goals, along with an appropriate amount of time to meet necessary emission reductions, while
providing environmental benefits to consumers.Cinergyhas supported this approach within the industry, Congress, and the Bush Administration in the
interest of achieving an energy and environmental balance in any final legislative package.

Ohio

On July 6, 1999, Ohio Governor Robert Taft signed Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill), beginning the transition to
electric deregulation and customer choice for the State of Ohio. The Electric Restructuring Bill created a competitive electric retail service market effective January 1, 2001. The legislation
provided for a market development period that began January 1, 2001, and ends no later than December 31, 2005.

On
May 8, 2000,CG&Ereached a stipulated agreement with the PUCO staff and various other interested parties with respect to its
proposal to implement electric customer choice in Ohio effective January 1, 2001. On August 31, 2000, the PUCO approvedCG&E'sstipulation
agreement. The major features of the agreement include:



48

---



With
regard to the PUCO's order, two parties filed applications for rehearing with the PUCO. On October 18, 2000, the PUCO denied these applications. One of the parties appealed to the Ohio
Supreme Court in the fourth quarter of 2000 andCG&Esubsequently intervened in that case. On April 6, 2001,CG&Efiled for dismissal of this
appeal. On July 25, 2001, the Ohio Supreme Court deniedCG&E'smotion to dismiss.CG&Eis unable to predict the outcome of this proceeding.

As
indicated above, the August 31, 2000 order authorizesCG&Eto transfer its generation assets to a non-regulated
affiliate. In addition to the regulatory approvals received from the PUCO, the IURC, and the KPSC, this transfer requires the approval of the FERC and the SEC under PUHCA. On October 29, 2001,
Cinergy Power Investments, Inc., (Power Investments) filed an application with the FERC seeking EWG status.CG&Ealso filed an application
seeking approval to transfer its generating assets to Power Investments. On December 21, 2001, the FERC issued an order certifying Power Investments' EWG status. As the transfer is contingent
uponCG&Ereceiving FERC approval, SEC approval under PUHCA, and various third party consents, the timing and receipt of which are unknown, the
completion date of the transfer of generation assets to Power Investments cannot be predicted.

In
anticipation of transferring the generation assets, Cinergy Wholesale Energy, Inc. (Wholesale Energy) was formed in the fourth quarter of 2000. Wholesale Energy is a direct
subsidiary ofCinergy Corp.and will be the holding company forCinergy'snon-regulated
energy commodities businesses, including Power Investments and Cinergy Power Generation Services, LLC.

Upon
FERC authorization, Power Investments will enter into a power sale arrangement withCG&Efor the duration of the market development
period, which is scheduled to terminate no later than December 31, 2005. Power Investments will supplyCG&Ewith sufficient power to meet the
standard service obligations ofCG&E'scustomers that do not choose an alternate electric commodity supplier. In addition, Power Investments will enter
into a second power sale agreement withCG&Eto provide sufficient power to fulfill the electric commodity obligations ofCG&E'swholesale
customers. Power Investments will also replaceCG&Eas the electric commodity supplier in a power sale arrangement
withULH&P. This new contract will replace the power sales agreement that is in place betweenCG&Eand ULH&P.

The
transfer ofCG&E'sgenerating assets to Power Investments will also affect the operating agreement between CG&E,PSI, and Services that has been in place since 1994. In 1994, when the operating agreement was
entered into, bothCG&EandPSIwere vertically integrated regulated electric
utilities.PSIis still a vertically integrated electric utility and the operations of its generating assets are still dedicated to Indiana ratepayers.
Due to this situation, the IURC,CG&E,PSI, and Power Investments reached an agreement on a new Joint
Generation Dispatch Agreement (JGDA). The JGDA allows for the joint dispatch of regulatedPSIgeneration with Power Investments deregulated generation.
If energy is transferred betweenPSIand Power Investments it will be priced at market

49

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rates. The majority ofPSI'selectric commodity requirements will be provided byPSI'sgeneration. For
more information refer to the "Termination of Operating Agreement" of this section.

Indiana

Indiana lawmakers are involved in creating an Energy Policy Commission to assist in completing a comprehensive energy plan. Indiana Governor Frank O'Bannon will
appoint members representing various stakeholder groups, including state government, industry, labor, and environmental representatives. This commission is expected to present a final report in
December 2002.

Kentucky

Throughout 1999, a special Kentucky Electricity Restructuring Task Force (Task Force), convened by the Kentucky legislature, studied the issues of electric
deregulation. In January 2000, the Task Force issued a final report to Kentucky Governor Paul Patton recommending that lawmakers wait until the 2002 General Assembly before considering any
deregulation that would open the state's electric industry to competition.

Other States

At the end of 2000, approximately one half of the states and the District of Columbia had adopted deregulation plans. However, recent events are significantly
influencing political and legislative activity. At the end of 2001, eight of the states decided to delay or suspend their deregulation activities. While we believe the situation in Ohio, as described
above, and generally within the Midwest are different, we cannot predict the consequences, if any, on efforts to deregulate or discontinue deregulation within our service territory or markets.

Other

Under generally accepted accounting principles,CG&E,PSI, and ULH&Papply the provisions of Statement of Financial Accounting Standards No. 71,Accounting for the Effects of Certain
Types of Regulation(Statement 71) to the applicable rate-regulated portions of their businesses. The provisions of Statement 71 allow CG&E,PSI, andULH&Pto capitalize (record as a deferred
asset) costs that would normally be charged to expense. These costs are classified as regulatory assets in the accompanying financial statements and the majority have been approved by regulators for
future recovery from customers through our rates. As of December 31, 2001,CG&E,PSI, and ULH&Phave approximately $1 billion of net regulatory assets, of which $952 million have been approved for recovery.

Except
with respect to the generation assets ofCG&E, as of December 31, 2001, CG&E,PSI, andULH&Pcontinue to meet each of the
criteria required for the application of Statement 71. However, to the extent other states implement deregulation legislation, the application of Statement 71 will need to be reviewed. Based on our
operating companies' current regulatory orders and the regulatory environment in which they currently operate, the future recovery of regulatory assets recognized in the accompanying Balance Sheets as
of December 31, 2001, is probable. The effect of future discontinuance of Statement 71 on the results of operations, cash flows, or statements of position cannot be determined until
deregulation legislation plans have been approved by each state in which we do business. See Note 1(c) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" for a further discussion of our regulatory assets.

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Midwest Independent Transmission System Operator, Inc. (Midwest ISO)

Historical

As part of the effort to create a competitive wholesale power marketplace, the FERC approved the formation of the Midwest ISO during 1998. In that same year, Cinergyagreed to join the Midwest ISO in preparation for meeting anticipated changes in the FERC regulations and future deregulation requirements. The
Midwest ISO was established as a non-profit organization to maintain functional control over the combined transmission systems of its members.

FERC Orders

On December 19, 2001, the FERC issued several key orders having considerable impact upon the Midwest ISO and its transmission owning members. Among other
determinations, the FERC approved
the proposal of the Midwest ISO to become the first FERC-approved Regional Transmission Organization (RTO). It also denied a similar proposal from the companies seeking to form the
Alliance Regional Transmission Organization (Alliance RTO) on the basis that the proposal lacked sufficient scope. The Alliance RTO is a planned for-profit transmission company involving
various utilities, which have transmission systems that cover parts of Michigan, Ohio, Indiana, West Virginia, and Virginia. The FERC encouraged the Alliance RTO companies to explore joining the
Midwest ISO and set a 60-day deadline for those companies to provide the FERC a statement of their plans to join an RTO. In addition, the FERC also directed the Midwest ISO to
file a plan with the FERC within 60 days to address interim operations for the period of time in which the Midwest ISO is operational and the Alliance RTO companies have not yet joined
an RTO.

In
related activity, the FERC issued an order on December 14, 2001, in response to protests of the Midwest ISO's proposed methodology related to the calculation of its
administrative adder fees for the services it provides.Cinergyand a number of other parties filed protests to the proposed methodology, suggesting,
among other things, that the methodology was inconsistent with the transmission owners' prior agreement with the Midwest ISO, and selectively allowed only independent transmission companies to choose
which unbundled administrative adder services they wished to purchase from the Midwest ISO. In its December 14, 2001 Order, the FERC found that the Midwest ISO's proposed methodology for
determination of the administrative adder fees had not been shown to be just and reasonable, and provided the Midwest ISO and the protesting parties a period of 60 days to reach settlement on
the issues before an evidentiary hearing would be conducted.

Operations Updates

On November 30, 2001, the Midwest ISO and Mid-Continent Area Power Pool (MAPP) closed a financial transaction in which the Midwest ISO agreed
to acquire certain assets and liabilities of MAPP, including its St. Paul, Minnesota control center. In addition, since the third quarter of 2001, the Midwest ISO and Southwest Power Pool (SPP) have
been in a process of agreeing upon a definitive document to establish a business combination which would include the Midwest ISO's purchase of substantially all of the assets of SPP and the assumption
of appropriate liabilities. A firm date for the closure of this transaction has not been established.

On
December 15, 2001, the Midwest ISO initiated startup of its operations with the provision of a variety of support or stand alone services to its transmission owning members.
The Midwest ISO achieved full startup, including implementation of tariff administration, on February 1, 2002.

State Regulatory Agencies Filings

In June 2001,Cinergyand various other Indiana Midwest ISO transmission owners made a joint state filing
with the IURC seeking permission to transfer functional control of their transmission

51

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facilities to the Midwest ISO. On December 17, 2001,Cinergyand four other transmission owning Indiana companies received conditional approval
from the IURC to transfer functional control of their transmission facilities to the Midwest ISO. The conditional terms of the approval were satisfied prior to the Midwest ISO full startup date of
February 1, 2002.

Repeal of PUHCA

Early in 2001, S. 206, a bill to repeal the PUHCA, was introduced in the Senate. It was referred to the Senate Committee on Banking, Housing and Urban Affairs for
action. Subsequently, a hearing was held in the Subcommittee on Securities and Investment to identify support for and opposition to this legislation. S. 206 was favorably reported out by a
19-1 vote by the full Senate Committee on Banking, Housing and Urban Affairs in April 2001. This legislation has been included as part of the Senate Energy Bill which will proceed
directly to the Senate floor for debate. Issues surrounding the Enron Corp. (Enron) collapse may have an adverse impact on full repeal of PUHCA, and some Senators have indicated an interest in
strengthening consumer protection aspects of the law. However, it currently remains as part of the Senate Energy Bill, scheduled for consideration in the first quarter of 2002.

In
the House of Representatives, Subcommittee on Energy and Air Quality Chairman Joe Barton has drafted an electricity deregulation bill which includes PUHCA repeal. That legislation is
also scheduled for consideration in the first quarter of 2002, but again several Committee members have expressed concern about PUHCA repeal in light of the Enron collapse. Cinergysupports PUHCA repeal
and will continue to monitor developments as well as possibilities for limited repeal.

Significant Rate Developments

Purchased Power Tracker

In May 1999,PSIfiled a petition with the IURC seeking approval of a purchased power tracking mechanism
(Tracker). This request was designed to provide for the recovery of costs related to purchases of power necessary to meet native load requirements to the extent such costs are not recovered through
the existing fuel adjustment clause.

A
hearing was held before the IURC in February 2001, to determine whether it was appropriate forPSIto continue the Tracker for
future periods. In April 2001, a favorable order was received extending the
Tracker for two years, through the summer of 2002.PSIis authorized to recover 90% of its purchased power expenses through the Tracker (net of the
displaced energy portion recovered through the fuel recovery process and net of the mitigation credit portions), with the remaining 10% deferred for subsequent recovery in PSI'snext general rate case
(subject to a showing of prudence).

In
March 2001, the IURC held a hearing to reviewPSI's2000 purchases and rule on its associated request for recovery of costs. In
May 2001, the IURC issued an order approving the recovery ofPSI'ssummer 2000 purchased power costs ($18.5 million) via the Tracker.

In
June 2001,PSIfiled a petition with the IURC seeking approval of the recovery through the Tracker of its summer 2001 purchased
power costs. In October 2001,PSIfiled an amended petition with the IURC, seeking approval of the costs associated with additional power
purchases made during July and August 2001. Hearings before the IURC were held in January 2002, with a decision expected in the second quarter of 2002.

Purchased Power Agreement

ULH&Ppurchases energy fromCG&Epursuant to a new contract
effective January 1, 2002, which was approved by the FERC and the KPSC. This five-year agreement is a negotiated fixed-rate contract withCG&Eand replaces the previous cost of service based
contract, which expired on December 31, 2001.

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Termination of Operating Agreement

Upon consummation of the merger betweenCG&Eand PSI Resources, Inc. in 1994, an operating agreement
entered into betweenCG&E,PSI, and Services was filed with and approved by the FERC. This agreement was
established to provide for the coordinated planning and operation of the two regulated entities' generation and transmission systems.

In
October 2000,CG&E,PSI, and Services filed a notice of termination of the
operating agreement with the FERC. The reason for the termination filing was that, with the introduction of deregulation in the State of Ohio, the companies no longer share the common characteristics
that formed the basis for the operating agreement. In December 2000, the FERC ruled that the companies have the contractual right to terminate the operating agreement. Additionally, the FERC
established a termination effective date of May 22, 2001, and set a May 1, 2001, hearing date on the issue of the reasonableness of termination.

Certain
parties appealed the FERC's December 2000 decision. In March 2001, the IURC initiated an investigation proceeding into the termination of the operating agreement.
In May 2001, the parties to the FERC proceeding reached a settlement resolving termination issues and certain compensation and damage issues. This settlement, which was approved by the FERC in
June 2001, delayed the termination of the existing operating agreement until a new successor agreement has been approved by the FERC. The settlement also provided that the parties would engage
in negotiations concerning the terms and conditions of a successor agreement(s).

In
August 2001, the parties to both the IURC investigation proceeding and the previous FERC proceeding entered into two complementary settlement agreements. Both agreements
addressed, among other things, the terms and conditions of a proposed new joint generation operating agreement and a proposed new joint transmission operating agreement. The IURC settlement agreement
was approved by the IURC in September 2001. Both the IURC and the FERC settlement agreements are conditioned upon FERC acceptance of the proposed successor agreements. Cinergyfiled the successor
agreements with the FERC in October 2001. At this time, we cannot predict the outcome or the timing of the FERC
proceedings regarding the proposed successor agreements.

PSI Fuel Adjustment Charge

PSIdefers fuel costs that are recoverable in future periods subject to IURC approval under a fuel recovery
mechanism. In June 2001, the IURC issued an order in aPSIfuel recovery proceeding, disallowing approximately $14 million of deferred
costs. On June 26, 2001,PSIformally requested that the IURC reconsider its disallowance decision. In August 2001, the IURC indicated
that it will reconsider its decision.PSIbelieves it has strong legal and factual arguments in its favor and that it will ultimately be permitted to
recover these costs. However,PSIcannot definitively predict the ultimate outcome of this matter.

In
June 2001,PSIfiled a petition with the IURC requesting authority to recover $16 million in under billed deferred fuel
costs incurred from March 2001 through May 2001. The IURC approved recovery of these costs subject to refund pending the findings of an investigative sub-docket. The
sub-docket was opened to investigate the reasonableness of, and underlying reasons for, the under billed deferred fuel costs. A hearing is scheduled for April 2002.

CWIP Ratemaking Treatment for NOX  Equipment

During the third quarter of 2001,PSIfiled an application with the IURC requesting CWIP ratemaking treatment for
costs related to NOX equipment currently being installed at certainPSIgeneration facilities. CWIP ratemaking treatment allows for the
recovery of carrying costs on the equipment during the construction period.PSIfiled its case-in-chief testimony in
January 2002.PSIanticipates that hearings
before the IURC will be scheduled during the second quarter of 2002. At this time, we cannot predict the outcome of this matter.

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Transfer of Generating Assets to PSI

In December 2001,PSIfiled a petition with the IURC requesting approval, under Indiana's Power Plant
Construction Act, to acquire the Butler County, Ohio and Henry County, Indiana peaking plants from Capital & Trading in order to maintain adequate reserve margins. The IURC has scheduled a
pre-hearing conference for February 2002 at which time the procedural schedule will be determined. This transfer is also contingent upon receipt of approval from the FERC and the
SEC.PSIis unable to predict the outcome of this request.

GAS INDUSTRY

ULH&P Gas Rate Case

On June 6, 2001,ULH&Pfiled a retail gas rate case with the KPSC seeking to increase base rates for
natural gas distribution services by $7.3 million annually, or 8.4% overall. In addition to an increase in base rates,ULH&Prequested recovery
through a tracking mechanism of the costs of an accelerated gas main replacement program with a capital cost of approximately $112 million over the next ten years. A hearing on this matter was
held in November 2001 and an order was issued on January 31, 2002. In the order the KPSC authorized a base rate increase of $2.7 million or 2.8% overall, to be effective on
January 31, 2002. In addition, the KPSC authorizedULH&Pto implement the tracking mechanism to recover the costs of the accelerated gas main
replacement program for an initial period of three years, with the possibility of renewal for the full ten years. Per the terms of the order, the tracker will be set annually and the first filing will
be made by March 31, 2002.ULH&Pwill request rehearing before the KPSC on selected items within the order. We expect a decision on these matters
by the end of the first quarter 2002.

CG&E Gas Rate Case

On July 31, 2001,CG&Efiled a retail gas rate case with the PUCO seeking to increase base rates for
natural gas distribution services by approximately $26 million or 5% overall. We expect that any rate
change as a result of this filing will be effective in the second quarter of 2002. Simultaneously,CG&Erequested recovery through a tracking mechanism
of the costs of an accelerated gas main replacement program with a capital cost of approximately $716 million over the next ten years. A hearing in this case will be held in the first quarter
of 2002.

Gas Prices

As the result of the market price of natural gas increasing significantly in 2000,CG&E'sand ULH&P'sgas supply costs increased. These costs are passed directly through to customers dollar-for-dollar under the gas cost
recovery mechanisms that are mandated by state law in Ohio and Kentucky. During 2001, the market price of natural gas decreased andCG&Eand ULH&Plowered their rates in accordance with the downward trending gas prices.

On
May 14, 2001,ULH&Pfiled an application with the KPSC requesting approval of a gas procurement-hedging program designed to
mitigate the effects of gas price volatility on customers. On July 16, 2001, the KPSC approved the pilot program for the 2001-2002 heating season, subject to certain restrictions.
The approved hedging program allows the pre-arranging of between 50-75% of winter heating season base load gas requirements.ULH&Pmade advance arrangements for approximately 50% of its winter
2001/2002 base load requirements under the program.

In
July 2001,CG&Efiled an application with the PUCO requesting approval of its gas procurement-hedging program. This request was
subsequently denied. However, in denyingCG&E'srequest for pre-approval of a hedging program, the PUCO order provided clarification that
prudently incurred hedging costs are a valid component ofCG&E'sgas purchasing strategy. As a result,CG&E

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has hedged approximately 50% of its winter 2001/2002 base load requirements andCG&Ewill seek PUCO approval for its hedging program on an after the
fact basis. At this time, we cannot predict the outcome of this event.

MARKET RISK SENSITIVE INSTRUMENT AND POSITIONS

Energy Commodities Sensitivity

The transactions associated with Energy Merchant's energy marketing and trading activities give rise to various risks, including market risk. Market risk
represents the potential risk of loss from adverse
changes in market price of electricity or other energy commodities. As Energy Merchant continues to develop its energy marketing and trading business (and due to its substantial investment in
generation assets), its exposure to movements in the price of electricity and other energy commodities may become greater. As a result, we may be subject to increased future earnings volatility.

The
energy marketing and trading activities of Energy Merchant principally consist ofCG&E'sandPSI'spower marketing and trading operations and
Marketing & Trading's natural gas marketing and trading operations. These operations market and trade
over-the-counter (an informal market where the buying/selling of commodities occurs) contracts for the purchase and sale of electricity (primarily in the Midwest region of the
U.S.), natural gas, and other energy-related products. In addition, Energy Merchant also trades natural gas and other energy-related products on the New York Mercantile Exchange. The power marketing
and trading operation consists of both physical activities (accounted for when the transaction settles) and trading activities (accounted for on a fair value basis). Transactions are designated as a
physical activity when there is intent and ability to physically deliver the power from company-owned generation. Substantially all of the electricity in the physical portfolio requires settlement by
physical delivery. All other transactions (including most natural gas contracts) are considered trading activities due to (a) the intent to financially settle the contracts, (b) the lack
of hard assets, or (c) the inability to serve with company-owned assets. Some contracts within the trading portfolio may require settlement by physical delivery, but often times can be netted
in accordance with industry standards at time of settlement.

Many
of the contracts in both the physical and trading portfolios commit us to purchase or sell electricity, natural gas, and other energy-related products at fixed prices in the future.
The majority of the contracts in the natural gas and other energy-related product portfolios are financially settled contracts (i.e., there is no physical delivery related with these items). In
addition, Energy Merchant also markets and trades over-the-counter option contracts. The use of these types of commodity instruments is designed to allow Energy Merchant to:



Energy
Merchant structures and modifies its net position to capture the following:



At
times, a net open position is created or is allowed to continue when Energy Merchant believes future changes in prices and market conditions may possibly result in profitable
positions. Position

55

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imbalances can also occur due to the basic lack of liquidity in the wholesale power market. The existence of net open positions can potentially result in an adverse impact on our financial condition
or results of operations. This potential adverse impact could be realized if the market price of electric power does not react in the manner or direction expected.

Energy
Merchant measures the market risk inherent in the trading portfolio employing value-at-risk (VaR) analysis and other methodologies, which utilize forward
price curves in electric power markets to quantify estimates of the magnitude and probability of potential future losses related to open contract positions. VaR is a statistical measure used to
quantify the potential loss in fair value of the trading portfolio over a particular period of time, with a specified likelihood of occurrence, due to an adverse market movement. Because most of the
contracts in the physical portfolio require physical delivery of electricity and generally do not allow for net cash settlement, these contracts are not included in the VaR analysis.

Our
VaR is reported as a percentage of operating income, based on a 95% confidence interval, utilizing one-day holding periods. This means that on a given day
(one-day holding period) there is a 95% chance (confidence interval) that our trading portfolio will lose less than the stated percentage of operating income. We disclose our VaR for power
activities as a percent of consolidated operating income on a one-day basis at December 31, the average one-day basis at the end of each quarter, and the daily basis at
December 31 of each year. On a one-day basis as of December 31, 2001, the VaR for the power trading activity was less than 1% of 2001 consolidated operating income and as of
December 31, 2000, was less than 1% of 2000 consolidated operating income. On a one-day basis at the end of each quarter, the VaR for the power trading activity was less than 2% of
consolidated operating income in 2001, and less than 1% in 2000. The daily VaR for the power trading portfolio as of December 31, 2000, was less than 1% of 2001 consolidated operating income
and as of December 31, 1999, was also less than 1% of 2000 consolidated operating income. The VaR model uses the variance-covariance statistical modeling technique and historical volatilities
and correlations over the past 200-day period. The estimated market prices used to value these transactions for VaR purposes reflect the use of established pricing models
and various factors including quotations from exchanges and over-the-counter markets, price volatility factors, the time value of money, and location differentials.

Energy
Merchant, through some of our non-regulated subsidiaries, actively markets physical natural gas and actively trades derivative commodity instruments which are usually
settled in cash including: forwards, futures, swaps, and options. The aggregated VaR amounts associated with these other trading and hedging activities were slightly more than one million dollars as
of December 31, 2001, and less than one million dollars at December 31, 2000. On a one-day basis as of December 31, 2001, the VaR for the gas trading activity was less
than 1% of 2001 consolidated operating income and as of December 31, 2000, was less than 1% of 2000 consolidated operating income. On a one-day basis at the end of each quarter, the
VaR for the gas trading activity was less than 1% of consolidated operating income in 2001, and less than 1% in 2000. The daily VaR for gas trading portfolio as of December 31, 2000, was less
than 1% of 2001 consolidated operating income and as of December 31, 1999, was also less than 1% of 2000 consolidated operating income. The VaR is calculated using a variance-covariance
methodology and historical volatilities and correlations over the past 21-day period with a 95% confidence interval and a one-day holding period.

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The
changes in fair value of the energy risk management assets and liabilities for the year ended December 31, 2001, are presented in the table below:

Change in Fair Value for the Year Ended
December 31, 2001(in millions)

Fair value of contracts outstanding at the beginning of the period

$
(78
)Fair value of new contracts when entered into during the period:Options(1)


15Other trading instruments


29Changes in fair value attributable to changes in valuation techniques and assumptions


10Other changes in fair value


53Less: Contracts realized or otherwise settled during the period


11Fair value of contracts outstanding at the end of the period

$
18


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The
following table presents the expected maturity of the energy risk management assets and liabilities as of December 31, 2001:

|                                                   |  | Fair Value of Contracts at December 31, 2001 |   
|-------------------------------------------------- |  | -------------------------------------------- | --
|
|
|
|
|Prices actively quoted                             |  | $                                            | 14
|Prices based on models and other valuation methods |  |                                              | 6 
|                                                   |  |                                              |   
|Total                                              |  | $                                            | 20
|                                                   |  |                                              |   

---

Concentrations of Credit Risk

Credit risk is the exposure to economic loss that would occur as a result of nonperformance by counterparties, pursuant to the terms of their contractual
obligations. Specific components of credit risk include counterparty default risk, collateral risk, concentration risk, and settlement risk.

Trade Receivables and Physical Power Portfolio

Our concentration of credit risk with respect to trade accounts receivable from electric and gas retail customers is limited. The large number of customers and
diversified customer base of residential, commercial, and industrial customers significantly reduces our credit risk. Contracts within the physical portfolio of power marketing and trading operations
are primarily with the traditional electric cooperatives and municipalities and other investor-owned utilities. At December 31, 2001, we do not believe we had significant exposure to credit
risk with our trade accounts receivable or our physical portfolio.

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Energy Trading

Cinergy'sextension of credit for energy marketing and trading is governed by a Corporate Credit Policy. Written
guidelines document the management approval levels for credit limits, evaluation of creditworthiness and credit risk mitigation procedures. Exposures to credit risks are monitored daily by the
Corporate Credit Risk function. As of December 31, 2001, approximately 97% of the credit exposure related to energy trading and marketing activity was with counterparties rated Investment Grade
or higher. Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity. Because of these issues, credit risk is generally greater than with other commodity trading.

In
December 2001, Enron filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. We decreased our trading activities with Enron in
the months prior to its bankruptcy filing. We intend to resolve any contract differences pursuant to the terms of those contracts, business practices and the applicable provisions of the Bankruptcy
Code, as approved by the court. While we cannot predict the court's resolution of these matters, we do not believe that any exposure relating to those contracts would have a material impact on our
financial position or results of operations. While most of our contracts with Enron were considered trading and thus recorded at fair value, a few contracts were accounted for utilizing the normal
exemption under Statement of Financial Accounting Standards No. 133,Accounting for Derivatives Instruments and Hedging Activities(Statement
133) (see Note 1(k) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data"). These contracts were recognized at fair value when the contracts were
terminated in the fourth quarter of 2001. Fair value for these contracts, and all terminated contracts with Enron, is governed by the provisions of each contract, but typically approximates fair value
at contract termination. However, the effect of the loss of Enron's participation in the energy markets on long-term liquidity and price volatility, or on the creditworthiness of common
counterparties cannot be determined. We continually review and monitor our credit exposure to all counterparties and adjust the fair value of our position, as appropriate.

Financial Derivatives

Potential exposure to credit risk also exists from our use of financial derivatives such as currency swaps, foreign exchange forward contracts, and interest rate
swaps. Because these financial instruments are transacted only with highly rated financial institutions, we do not anticipate nonperformance by any of the counterparties.

Risk Management

We manage, on a portfolio basis, the market risks in our energy marketing and trading transactions subject to parameters established by our Risk Policy Committee.
Our market and credit risks are monitored by the Corporate Risk Management function to ensure compliance with stated risk management policies and procedures. The Corporate Risk Management function
operates independently from the business units and other corporate functions, which originate and actively
manage the market and credit risk exposures. Policies and procedures are periodically reviewed and monitored to ensure their responsiveness to changing market and business conditions. In addition,
efforts are ongoing to develop systems to improve the timeliness and quality of market and credit risk information. Credit risk mitigation practices include requiring parent company guarantees,
various forms of collateral, and the use of mutual netting/closeout agreements.

Exchange Rate Sensitivity

From time to time, we may utilize foreign exchange forward contracts and currency swaps to hedge foreign currency denominated purchase and sale commitments and
certain of our net investments in

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foreign operations. These contracts and swaps allow us to potentially hedge our position against currency exchange rate fluctuations and would qualify as derivatives.

Cinergyhas exposure to fluctuations in exchange rates between the U.S. dollar and the currencies of foreign countries where we have
investments. When it is appropriate we will hedge our exposure to cash flow transactions, such as a dividend payment by one of our foreign subsidiaries. As of December 31, 2001, we had no
outstanding foreign currency derivatives.

Interest Rate Sensitivity

Our net exposure to changes in interest rates consists of short-term debt instruments (including netNotes receivable
from/Notes payable to affiliated companies), pollution control debt, and sales of accounts receivable. The following table reflects the different instruments used and the
method of benchmarking interest rates, as of December 31, 2001, and 2000:

|                                       |  | Interest Benchmark                   |  | 2001                   |  | 2000
|-------------------------------------- |  | ------------------------------------ |  | ---------------------- |  | ----
|
|Short-term Bank Loans/Commercial Paper |  |  Short-term Money Market
 LIBOR(1) |  | Cinergy
CG&E
PSI
ULH&P |  | $   
|Pollution Control Debt                 |  |  Daily Market
 Auction Rate        |  | Cinergy
CG&E
PSI       |  |     
|Sales of Accounts Receivable           |  |  Short-term Money Market            |  | Cinergy
CG&E
PSI
ULH&P |  |     
|Variable Rate Capital Leases           |  |  LIBOR(1)                           |  | Cinergy
CG&E           |  |     

---

The
weighted-average interest rates on the above instruments at December 31, 2001, and 2000, were as follows:

2001

2000Short-term Bank Loans/Commercial Paper

2.9%

7.0%Pollution Control Debt

2.1%

4.5%Sales of Accounts Receivable

2.4%

7.0%Variable Rate Capital Leases



7.5%


At
December 31, 2001, forward yield curves project an increase in applicable short-term interest rates over the next five years.

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The following table presents principal cash repayments, by maturity date and other selected information, for each registrant's long-term fixed-rate debt, other
debt, and capital lease obligations as of December 31, 2001:

|                     |                                   | Expected Maturity Date
|-------------------- | --------------------------------- | ----------------------
|
|
|Cinergy              |                                   |                       
|Long-term Debt(1)    |                                   | $                     
|                     | Weighted-average interest rate(2) |                       
|Other(3)             |                                   | $                     
|                     | Weighted-average interest rate(2) |                       
|Capital Leases       |                                   |                       
|                     | Fixed-rate leases                 |                       
|                     | Interest rate                     |                       
|                    
|CG&Eand subsidiaries |                                   |                       
|Long-term Debt(1)    |                                   | $                     
|                     | Weighted-average interest rate(2) |                       
|Capital Leases       |                                   |                       
|                     | Fixed-rate leases                 |                       
|                     | Interest rate                     |                       
|                    
|PSI                  |                                   |                       
|Long-term Debt(1)    |                                   | $                     
|                     | Weighted-average interest rate(2) |                       
|Capital Leases       |                                   |                       
|                     | Fixed-rate leases                 |                       
|                     | Interest rate                     |                       
|                    
|ULH&P                |                                   |                       
|Long-term Debt(1)    |                                   | $                     
|                     | Weighted-average interest rate(2) |                       
|Capital Leases       |                                   |                       
|                     | Fixed-rate leases                 |                       
|                     | Interest rate                     |                       

---

Our current policy in managing exposure to fluctuations in interest rates is to maintain the total amount of outstanding debt in floating interest
rate debt instruments of approximately 30%. In maintaining this level of exposure, we use interest rate swaps. Under these swaps, we agree with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated on an agreed notional amount.CG&Ehas an
outstanding interest rate swap agreement that decreased the percentage of floating-rate debt. Under the provisions of the swap, which has a notional amount of $100 million, CG&Epays a
fixed-rate and receives a floating-rate through October 2007. This swap qualifies as a cash flow hedge under
the provisions of Statement 133. As the terms of the swap agreement mirror the terms of the debt agreement that it is hedging, we anticipate

60

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that this swap will continue to be effective as a hedge. Changes in fair value of this swap are recorded inAccumulated other comprehensive income
(loss), beginning with our adoption of Statement 133 on January 1, 2001. In October 2001,Cinergy Corp.executed
three interest rate swaps with a combined notional amount of $250 million. Under the provisions of the swaps,Cinergy Corp.will receive
fixed-rate interest payments and pay floating-rate interest payments through September 2004. These swaps qualify as fair value hedges under the provisions of Statement
133. We anticipate that these swaps will continue to be effective as hedges. See Note 1(l) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data" for
additional information on financial derivatives. In the future, we will continually monitor market conditions to evaluate whether to modify our level of exposure to fluctuations in interest rates.

INFLATION

We believe that the recent inflation rates do not materially impact our financial condition. However, under existing regulatory practice for all of PSI,ULH&P, and the non-generating portion ofCG&E, only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plant costs
may not be adequate to replace plant in future years.

ACCOUNTING MATTERS

Accounting Estimates

Fair Value Accounting for Energy Marketing and Trading

We use fair value accounting for energy trading contracts, which is required, with certain exceptions, by Statement 133 and Emerging Issues Task Force (EITF)
98-10,Accounting for Contracts Involved in Energy Trading and Risk Management Activities. Most of the contracts used in our trading
activities are short-term in nature and are priced using exchange based or over-the-counter price quotes. Long-term contracts typically must be valued
using model pricing due to the lack of actively quoted prices. The period for which actively quoted prices are available varies by commodity and pricing point, but is generally shorter for electricity
than gas. Use of model pricing requires estimation surrounding factors such as volatility and future price expectations beyond the actively quoted portion of the price curve. In addition, some
contracts do not have fixed notional amounts and therefore must be valued using estimates of volumes to be consumed by the counterparty.

We
attempt to mitigate these risks by using complex valuation tools, both external and proprietary, which allow us to model prices for periods for which active quotes are unavailable.
These models are dynamic and are constantly updated with the most recent data to improve estimates of future expectations. We attempt to mitigate risks for contracts that do not contain fixed notional
amounts by obtaining historical data and projecting expected consumption. These models incorporate expectations surrounding the impacts that weather may play in future consumption. We also have a
Corporate Risk Management function withinCinergythat is independent of the marketing and trading function and is under the oversight of a risk policy
committee comprised primarily of senior company executives. This group's function is to provide an independent evaluation of both forward price curves and the valuation of energy contracts.

There
is inherent risk in valuation modeling given the complexity and volatility of energy markets. Fair value accounting has risk, including its application to short-term
contracts, as gains and losses recorded
through its use are not yet realized. Therefore, it is possible that results in future periods may be materially different as contracts are ultimately settled.

61

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Retail Customer Revenue Recognition

Our retail revenues include amounts that are not yet billed to customers. Customers are billed throughout the month as both gas and electric meters are read. We
recognize revenues for retail energy sales that have not yet been billed, but where gas or electricity has been consumed. This is termed "unbilled revenue" and is a widely recognized and accepted
practice for utilities. In making our estimates of unbilled revenue, we must estimate the effect of weather on consumption. We use complex systems that consider various factors, including weather, in
estimation of retail customer consumption at the end of each month. Given the use of these systems and the fact that customers are billed monthly, we believe it is unlikely that materially different
results will occur in future periods when revenue is billed.

Accounting Changes

Business Combinations and Intangible Assets

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations(Statement 141), and No. 142,Goodwill and Other Intangible Assets(Statement 142). Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and
other intangibles with indefinite lives will no longer be subject to amortization. Goodwill will be initially assessed for impairment shortly after adoption and at least annually thereafter by
applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under current accounting standards. This test must be applied at the "reporting unit" level, which
is not permitted to be broader than the current business segments discussed in Note 16 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data". Under
Statement 142, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can
be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. We began applying Statement 141 in the third quarter of 2001 and we will adopt Statement 142 in the
first quarter of 2002. The discontinuance of amortization of goodwill beginning in the first quarter of 2002 will not be material to our results of operations. We have identified the reporting units
forCinergyand are in the process of performing the initial impairment test. Preliminary estimates indicate that the effects of this test will not be
material to our results of operations.

Asset Retirement Obligations

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement
Obligations(Statement 143). Statement 143 requires fair value recognition of legal obligations to retire long-lived assets at the time such obligations are
incurred. The initial recognition of this liability will be accompanied by a corresponding increase in property, plant, and equipment. Subsequent to the initial recognition, the liability will be
adjusted for any revisions to the expected cash flows of the retirement obligation (with corresponding adjustments to property, plant, and equipment), and for accretion of the liability due to the
passage of time (recognized as an operation expense). Additional depreciation expense will be recorded prospectively for any property, plant, and equipment increases. We currently accrue costs of
removal on many regulated, long-lived assets through depreciation expense, with a corresponding charge to accumulated depreciation, as allowed by each regulatory jurisdiction. For assets
that we conclude have a retirement obligation under Statement 143, the accounting we currently use will be modified to comply with this standard. We will adopt Statement 143 in the first quarter of
2003. We are beginning to analyze the impact of this statement, but, at this time, we are unable to predict whether the implementation of this accounting standard will be material to our financial
position or results of operations.

62

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Derivatives

During 1998, the FASB issued Statement 133. This standard was effective forCinergybeginning in 2001, and
requires us to record derivative instruments which are not exempt under certain provisions of Statement 133 as assets or liabilities, measured at fair value (i.e.,
mark-to-market). Our financial statements reflect the adoption of Statement 133 in the first quarter of 2001. Since many of our derivatives were previously required to use
mark-to-market accounting, the effects of implementation were not material.

Our
adoption did not reflect the potential impact of applying mark-to-market accounting to selected electricity options and capacity contracts. We had not
historically marked these instruments to market because they are intended as either hedges of peak period exposure or sales contracts served with physical generation, neither of which were considered
trading activities. At adoption, we classified these contracts as normal purchases or sales based on our interpretation of Statement 133 and in the absence of definitive guidance on such contracts. In
June 2001, the FASB staff issued guidance on the application of the normal purchases and sales exemption to electricity contracts containing characteristics of options. While much of the
criteria this guidance requires is consistent with the existing guidance in Statement 133, some criteria were added. We adopted the new guidance in the third quarter of 2001, and the effects of
implementation for these contracts were not material. We will continue to apply this guidance to any new electricity contracts that meet the definition of a derivative.

In
October 2001, the FASB staff posted revised guidance on the normal purchases and sales exemption for these contracts. This revised guidance proposed changes in certain
quantitative criteria that were critical to determining whether or not a contract with option characteristics qualified for the normal exemption. In December 2001, the FASB staff again revised
this guidance to make the changes proposed by the October guidance more qualitative than quantitative. This new guidance uses several factors to distinguish between capacity contracts, which qualify
for the normal purchases and sales exemption, and options, which do not. These factors include deal tenor, pricing structure, specification of the source of power, and various other factors. Based on
a review of existing contracts, we do not believe this revised guidance, which will be effective in the third quarter of 2002, will have a material impact on our financial position or results of
operations upon adoption. However, given our activity in energy trading, it could increase volatility in future results.

In
October 2001, the FASB staff released final guidance on the applicability of the normal purchases and sales exemption to contracts that contain a minimum quantity (a forward
component) and flexibility to take additional quantity (an option component). While this guidance was issued primarily to address optionality in fuel supply contracts, it is applicable to all
derivatives (subject to certain exceptions for capacity contracts in electricity discussed in the previous paragraphs). This guidance concludes that such contracts are not eligible for the normal
purchases and sales exemption due to the existence of optionality in the contract.Cinergyhas certain contracts that contain optionality, primarily
coal contracts, for which the accounting may be impacted by this new guidance. We will adopt this guidance in the second quarter of 2002, consistent with the transition provisions. We have begun
analyzing contracts to determine the applicability of this guidance and to determine the interaction between this guidance and Statement 71. Due to a lack of liquidity with respect to coal purchased
under certain contracts, some of our contracts may fail to meet the net settlement criteria of Statement 133, which would preclude such contracts from being considered derivatives. For other possibly
affected contracts, we are evaluating the potential for contract restructuring prior to the adoption of this new guidance. To the extent this restructuring results in separate forwards and options, we
would plan to apply the normal exemption to the forwards. The options would either be accounted for as cash flow hedges, to the extent all criteria were met, or marked to market similar to all other
energy trading contracts. Given these evaluations are ongoing, we are unable to predict whether the implementation of this accounting standard will be material to our results of operations or
financial position.

63

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Asset Impairment

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144,Accounting for the Impairment of
Long-Lived Assets(Statement 144). Statement 144 addresses accounting and reporting for the impairment or disposal of long-lived assets. It
supersedes previous guidance on (a) accounting for the impairment or disposal of long-lived assets and (b) accounting and reporting for the disposal of a segment of a
business (commonly known as discontinued operations). While Statement 144 incorporates many of the impairment tests and criteria from previous guidance, it does include additional guidance and
resolution of inconsistencies and overlaps with other pronouncements. These include adding clarity around when assets are considered held for disposal (which requires an immediate impairment charge if
fair value is less than book value) and requiring the use of one
accounting model for long-lived assets to be disposed of. We will begin applying Statement 144 in the first quarter of 2002. The impact of implementation on our results of operations and
financial position is expected to be immaterial.

INSURANCE

On September 11, 2001, the U.S. experienced terrorists' attacks which resulted in significant loss of life and property. As a result of this tragedy,
insurers generally re-evaluated coverage limitations and premium levels. WhileCinergyis anticipating increases in its current premiums, we
do not expect a material change in the availability of coverage. Management does not believe potential premium increases will be material to our results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to the "Market Risk Sensitive Instruments and Positions" section of "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations".

64

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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

|                                                       |                                                                                                       | Page
Number
|------------------------------------------------------ | ----------------------------------------------------------------------------------------------------- | -----------
|FINANCIAL STATEMENTS                                   |                                                                                                       |            
|Report of Independent Public Accountants               |                                                                                                       | 66         
|Cinergy Corp. and Subsidiaries                         |                                                                                                       |            
|                                                       | Consolidated Statements of Income for the three years ended December 31, 2001                         |            
|                                                       | Consolidated Balance Sheets at December 31, 2001 and 2000                                             |            
|                                                       | Consolidated Statements of Changes in Common Stock Equity for the three years ended December 31, 2001 |            
|                                                       | Consolidated Statements of Cash Flows for the three years ended December 31, 2001                     |            
|The Cincinnati Gas & Electric Company and Subsidiaries |                                                                                                       |            
|                                                       | Consolidated Statements of Income for the three years ended December 31, 2001                         |            
|                                                       | Consolidated Balance Sheets at December 31, 2001 and 2000                                             |            
|                                                       | Consolidated Statements of Changes in Common Stock Equity for the three years ended December 31, 2001 |            
|                                                       | Consolidated Statements of Cash Flows for the three years ended December 31, 2001                     |            
|                                                       | Consolidated Statements of Capitalization at December 31, 2001, and 2000                              |            
|PSI Energy, Inc. and Subsidiary                        |                                                                                                       |            
|                                                       | Consolidated Statements of Income for the three years ended December 31, 2001                         |            
|                                                       | Consolidated Balance Sheets at December 31, 2001 and 2000                                             |            
|                                                       | Consolidated Statements of Changes in Common Stock Equity for the three years ended December 31, 2001 |            
|                                                       | Consolidated Statements of Cash Flows for the three years ended December 31, 2001                     |            
|                                                       | Consolidated Statements of Capitalization at December 31, 2001, and 2000                              |            
|The Union Light, Heat and Power Company                |                                                                                                       |            
|                                                       | Statements of Income for the three years ended December 31, 2001                                      |            
|                                                       | Balance Sheets at December 31, 2001 and 2000                                                          |            
|                                                       | Statements of Changes in Common Stock Equity for the three years ended December 31, 2001              |            
|                                                       | Statements of Cash Flows for the three years ended December 31, 2001                                  |            
|                                                       | Statements of Capitalization at December 31, 2001, and 2000                                           |            
|Notes to Financial Statements                          |                                                                                                       | 96         
|FINANCIAL STATEMENT SCHEDULES                          |                                                                                                       |            
|                                                       | Schedule IIValuation and Qualifying Accounts                                                         |            
|                                                       |                                                                                                       | Cinergy    
|                                                       |                                                                                                       | CG&E       
|                                                       |                                                                                                       | PSI        
|                                                       |                                                                                                       | ULH&P      

The information required to be submitted in schedules other than those indicated above has been included in the Balance Sheets, the Statements of Income,
related schedules, the notes thereto, or omitted as not required by the Rules of Regulation S-X.

65

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To
the Board of Directors of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company:

We
have audited the financial statements of Cinergy Corp. (a Delaware Corporation), The Cincinnati Gas & Electric Company (an Ohio Corporation), PSI Energy, Inc. (an
Indiana Corporation) and The Union Light, Heat and Power Company (a Kentucky Corporation), as of December 31, 2001 and 2000, and each of the three years in the period ended December 31,
2001, as listed in the Index to Financial Statements and Financial Statement Schedules. These financial statements and the schedules referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cinergy Corp., The Cincinnati Gas & Electric
Company, PSI Energy, Inc., and The Union Light, Heat and Power Company as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

Our
audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the Index to Financial Statements and Financial
Statement Schedules pursuant to Item 14, are presented for purposes of complying with the Securities and Exchange Commission's Rules of 1934 and are not part of the basic financial statements.
The schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements taken as a whole.

Arthur
Andersen LLP
Cincinnati, Ohio
January 24, 2002

66

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CINERGY CORP.AND SUBSIDIARY COMPANIES

67

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CINERGY CORP.  CONSOLIDATED STATEMENTS OF INCOME

|                                                                 |                                        | 2001 |                          | 2000      |   | 1999      
|---------------------------------------------------------------- | -------------------------------------- | ---- | ------------------------ | --------- | - | ----------
|
|Operating Revenues                                               |                                        |      |                          |           |   |           
|                                                                 | Electric                               |      | $                        | 8,181,233 |   | $         
|                                                                 | Gas                                    |      |                          | 4,662,916 |   |           
|                                                                 | Other                                  |      |                          | 78,388    |   |           
|                                                                 |                                        |      |                          |           |   |           
|                                                                 |                                        |      | Total Operating Revenues |           |   | 12,922,537
|                                                                 |                                        |      |                          |           |   |           
|Operating Expenses                                               |                                        |      |                          |           |   |           
|                                                                 | Fuel and purchased and exchanged power |      |                          | 5,910,959 |   |           
|                                                                 | Gas purchased                          |      |                          | 4,431,899 |   |           
|                                                                 | Operation and maintenance              |      |                          | 1,032,031 |   |           
|                                                                 | Depreciation                           |      |                          | 378,140   |   |           
|                                                                 | Taxes other than income taxes          |      |                          | 227,652   |   |           
|                                                                 |                                        |      |                          |           |   |           
|                                                                 |                                        |      | Total Operating Expenses |           |   | 11,980,681
|                                                                 |                                        |      |                          |           |   |           
|Operating Income                                                 |                                        |      | 941,856                  |           |   | 861,628   
|                                                                 |                                        |      |                          |           |   |           
|Equity in Earnings (Losses) of Unconsolidated Subsidiaries       |                                        |      | 2,266                    |           |   | 5,048     
|Gain on Sale of Investment in Unconsolidated Subsidiary(Note 11) |                                        |      |                         |           |   |          
|Miscellaneous  Net                                              |                                        |      | 26,290                   |           |   | 13,391    
|Interest                                                         |                                        |      | 268,127                  |           |   | 224,459   
|Preferred Dividend Requirement of Subsidiary Trust(Note 4)       |                                        |      | 1,067                    |           |   |          
|                                                                 |                                        |      |                          |           |   |           
|Income Before Taxes                                              |                                        |      | 701,218                  |           |   | 655,608   
|                                                                 |                                        |      |                          |           |   |           
|Income Taxes(Note 12)                                            |                                        |      | 255,506                  |           |   | 251,557   
|Preferred Dividend Requirements of Subsidiaries                  |                                        |      | 3,433                    |           |   | 4,585     
|                                                                 |                                        |      |                          |           |   |           
|Net Income                                                       |                                        | $    | 442,279                  |           | $ | 399,466   
|                                                                 |                                        |      |                          |           |   |           
|Average Common Shares Outstanding                                |                                        |      | 159,110                  |           |   | 158,938   
|                                                                 |                                        |      |                          |           |   |           
|Earnings Per Common Share(Note 17)                               |                                        |      |                          |           |   |           
|                                                                 | Net Income                             |      | $                        | 2.78      |   | $         
|                                                                 |                                        |      |                          |           |   |           
|Earnings Per Common Share  Assuming Dilution(Note 17)           |                                        |      |                          |           |   |           
|                                                                 | Net Income                             |      | $                        | 2.75      |   | $         
|                                                                 |                                        |      |                          |           |   |           
|Dividends Declared Per Common Share                              |                                        | $    | 1.80                     |           | $ | 1.80      
|                                                                 |                                        |      |                          |           |   |           

The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.

68

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CINERGY CORP.  CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                 | December 31        
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
|
|
|ASSETS                                   |                                                                                                                                                 |                    
|Current Assets                           |                                                                                                                                                 |                    
|                                         | Cash and cash equivalents                                                                                                                       |                    
|                                         | Restricted deposits                                                                                                                             |                    
|                                         | Notes receivable                                                                                                                                |                    
|                                         | Accounts receivable less accumulated provision for doubtful accounts of $35,580 at December 31, 2001, and $29,951 at December 31, 2000 (Note 7) |                    
|                                         | Materials, supplies, and fuel  at average cost                                                                                                 |                    
|                                         | Energy risk management current assets (Note 1(k))                                                                                               |                    
|                                         | Prepayments and other                                                                                                                           |                    
|                                         |                                                                                                                                                 |                    
|                                         |                                                                                                                                                 |                    
|Property, Plant, and Equipment  at Cost |                                                                                                                                                 |                    
|                                         | Utility plant in service                                                                                                                        |                    
|                                         | Construction work in progress                                                                                                                   |                    
|                                         |                                                                                                                                                 |                    
|                                         |                                                                                                                                                 | Total Utility Plant
|                                         | Non-regulated property, plant, and equipment                                                                                                    |                    
|                                         | Accumulated depreciation                                                                                                                        |                    
|                                         |                                                                                                                                                 |                    
|                                         |                                                                                                                                                 |                    
|Other Assets                             |                                                                                                                                                 |                    
|                                         | Regulatory assets (Note 1(c))                                                                                                                   |                    
|                                         | Investments in unconsolidated subsidiaries                                                                                                      |                    
|                                         | Energy risk management non-current assets (Note 1(k))                                                                                           |                    
|                                         | Other investments                                                                                                                               |                    
|                                         | Goodwill                                                                                                                                        |                    
|                                         | Other intangible assets                                                                                                                         |                    
|                                         | Other                                                                                                                                           |                    
|                                         |                                                                                                                                                 |                    
|                                         |                                                                                                                                                 |                    
|Total Assets                             |                                                                                                                                                 | $                  
|                                         |                                                                                                                                                 |                    

The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.

69

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CINERGY CORP.
CONSOLIDATED BALANCE SHEETS

|                                                   |                                                                                                                                                             | December 31 |                              
|-------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | -----------------------------
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY               |                                                                                                                                                             |             |                              
|Current Liabilities                                |                                                                                                                                                             |             |                              
|                                                   | Accounts payable                                                                                                                                            |             | $                            
|                                                   | Accrued taxes                                                                                                                                               |             |                              
|                                                   | Accrued interest                                                                                                                                            |             |                              
|                                                   | Notes payable and other short-term obligations (Note 6)                                                                                                     |             |                              
|                                                   | Long-term debt due within one year (Note 5)                                                                                                                 |             |                              
|                                                   | Energy risk management current liabilities (Note 1(k))                                                                                                      |             |                              
|                                                   | Other                                                                                                                                                       |             |                              
|                                                   |                                                                                                                                                             |             |                              
|                                                   |                                                                                                                                                             |             | Total Current Liabilities    
|Non-Current Liabilities                            |                                                                                                                                                             |             |                              
|                                                   | Long-term debt (Note 5)                                                                                                                                     |             |                              
|                                                   | Deferred income taxes (Note 12)                                                                                                                             |             |                              
|                                                   | Unamortized investment tax credits                                                                                                                          |             |                              
|                                                   | Accrued pension and other postretirement benefit costs (Note 10)                                                                                            |             |                              
|                                                   | Energy risk management non-current liabilities (Note 1(k))                                                                                                  |             |                              
|                                                   | Other                                                                                                                                                       |             |                              
|                                                   |                                                                                                                                                             |             |                              
|                                                   |                                                                                                                                                             |             | Total Non-Current Liabilities
|Total Liabilities                                  |                                                                                                                                                             |             | 8,989,194                    
|Preferred Trust Securities(Note 4)                 |                                                                                                                                                             |             |                              
|                                                   | Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company                          |             |                              
|Cumulative Preferred Stock of Subsidiaries(Note 3) |                                                                                                                                                             |             |                              
|                                                   | Not subject to mandatory redemption                                                                                                                         |             |                              
|Common Stock Equity(Note 2)                        |                                                                                                                                                             |             |                              
|                                                   | Common Stock  $.01 par value; authorized shares  600,000,000; outstanding shares  159,402,839 at December 31, 2001, and 158,967,661 at December 31, 2000 |             |                              
|                                                   | Paid-in capital                                                                                                                                             |             |                              
|                                                   | Retained earnings                                                                                                                                           |             |                              
|                                                   | Accumulated other comprehensive income (loss) (Note 19)                                                                                                     |             |                              
|                                                   |                                                                                                                                                             |             |                              
|                                                   |                                                                                                                                                             |             | Total Common Stock Equity    
|Commitments and Contingencies(Note 13)             |                                                                                                                                                             |             |                              
|Total Liabilities and Shareholders' Equity         |                                                                                                                                                             | $           | 12,299,813                   
|                                                   |                                                                                                                                                             |             |                              

The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.

70

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CINERGY CORP.  CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

|                                                 |                                                                          | Common
Stock                                        |       | Paid-in
Capital |   | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income (Loss) |           | Total
Common
Stock
Equity |  
|------------------------------------------------ | ------------------------------------------------------------------------ | --------------------------------------------------- | ----- | --------------- | - | ----------------- | - | --------------------------------------------- | --------- | ------------------------- | -
|
|1999                                             |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Beginning balance                                |                                                                          | $                                                   | 1,587 |                 | $ | 1,595,237         |   | $                                             | 945,214   |                           | $
|Comprehensive income:                            |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 | Net income                                                               |                                                     |       |                |   |                   |  |                                               |           | 403,641                   |  
|                                                 | Other comprehensive income (loss), net of tax effect of $5,289 (Note 19) |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                          | Foreign currency translation adjustment             |       |                 |  |                   |   |                                              |           |                           | 
|                                                 |                                                                          | Minimum pension liability adjustment                |       |                 |  |                   |   |                                              |           |                           | 
|                                                 |                                                                          | Unrealized gain (loss) on investment trusts         |       |                 |  |                   |   |                                              |           |                           | 
|                                                 |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 | Total comprehensive income                                               |                                                     |       |                |   |                   |  |                                               |           |                          |  
|Issuance of 258,867 shares of common stock  net |                                                                          |                                                     | 2     |                 |   | 6,720             |   |                                               |          |                           |  
|Treasury shares purchased                        |                                                                          |                                                     |      |                 |   | (233              | ) |                                               |          |                           |  
|Treasury shares reissued                         |                                                                          |                                                     |      |                 |   | 3,660             |   |                                               |          |                           |  
|Dividends on common stock ($1.80 per share)      |                                                                          |                                                     |      |                 |   |                  |   |                                               | (284,545  | )                         |  
|Other                                            |                                                                          |                                                     |      |                 |   | (7,830            | ) |                                               | 9         |                           |  
|                                                 |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Ending balance                                   |                                                                          | $                                                   | 1,589 |                 | $ | 1,597,554         |   | $                                             | 1,064,319 |                           | $
|2000                                             |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Comprehensive income:                            |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 | Net income                                                               |                                                     |       |                |   |                   |  |                                               |           | 399,466                   |  
|                                                 | Other comprehensive income (loss), net of tax effect of $2,755 (Note 19) |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                          | Foreign currency translation adjustment             |       |                 |  |                   |   |                                              |           |                           | 
|                                                 |                                                                          | Minimum pension liability adjustment                |       |                 |  |                   |   |                                              |           |                           | 
|                                                 |                                                                          | Unrealized gain (loss) on investment trusts         |       |                 |  |                   |   |                                              |           |                           | 
|                                                 |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 | Total comprehensive income                                               |                                                     |       |                |   |                   |  |                                               |           |                          |  
|Issuance of 44,262 shares of common stock  net  |                                                                          |                                                     | 1     |                 |   | 1,769             |   |                                               |          |                           |  
|Treasury shares purchased                        |                                                                          |                                                     |      |                 |   | (3,969            | ) |                                               |          |                           |  
|Treasury shares reissued                         |                                                                          |                                                     |      |                 |   | 11,008            |   |                                               |          |                           |  
|Dividends on common stock ($1.80 per share)      |                                                                          |                                                     |      |                 |   |                  |   |                                               | (285,242  | )                         |  
|Other                                            |                                                                          |                                                     |      |                 |   | 12,791            |   |                                               | 570       |                           |  
|                                                 |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Ending balance                                   |                                                                          | $                                                   | 1,590 |                 | $ | 1,619,153         |   | $                                             | 1,179,113 |                           | $
|2001                                             |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Comprehensive income:                            |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 | Net income                                                               |                                                     |       |                |   |                   |  |                                               |           | 442,279                   |  
|                                                 | Other comprehensive income (loss), net of tax effect of $1,454(Note 19)  |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                          | Foreign currency translation adjustment             |       |                 |  |                   |   |                                              |           |                           | 
|                                                 |                                                                          | Minimum pension liability adjustment                |       |                 |  |                   |   |                                              |           |                           | 
|                                                 |                                                                          | Unrealized gain (loss) on investment trusts         |       |                 |  |                   |   |                                              |           |                           | 
|                                                 |                                                                          | Cumulative effect of change in accounting principle |       |                 |  |                   |   |                                              |           |                           | 
|                                                 |                                                                          | Cash flow hedges(Note 1(l))                         |       |                 |  |                   |   |                                              |           |                           | 
|                                                 |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 | Total comprehensive income                                               |                                                     |       |                |   |                   |  |                                               |           |                          |  
|Issuance of 435,178 shares of common stock  net |                                                                          |                                                     | 4     |                 |   | 9,896             |   |                                               |          |                           |  
|Treasury shares purchased                        |                                                                          |                                                     |      |                 |   | (10,015           | ) |                                               |          |                           |  
|Treasury shares reissued                         |                                                                          |                                                     |      |                 |   | 9,157             |   |                                               |          |                           |  
|Dividends on common stock($1.80 per share)       |                                                                          |                                                     |      |                 |   |                  |   |                                               | (286,289  | )                         |  
|Stock purchase contracts(Note 4)                 |                                                                          |                                                     |      |                 |   | (23,200           | ) |                                               |          |                           |  
|Other                                            |                                                                          |                                                     |      |                 |   | 14,668            |   |                                               | 2,032     |                           |  
|                                                 |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Ending balance                                   |                                                                          | $                                                   | 1,594 |                 | $ | 1,619,659         |   | $                                             | 1,337,135 |                           | $
|                                                 |                                                                          |                                                     |       |                 |   |                   |   |                                               |           |                           |  

The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.

71

---



CINERGY CORP.  CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                      | 2001                                                        |                                                     | 2000                                                               |            | 1999    |         
|---------------------------------------------------- | ------------------------------------------------------------------------------------ | ----------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------------------------------ | ---------- | ------- | --------
|
|Operating Activities                                 |                                                                                      |                                                             |                                                     |                                                                    |            |         |         
|                                                     | Net income                                                                           |                                                             | $                                                   | 442,279                                                            |            | $       | 399,466 
|                                                     | Items providing or (using) cash currently:                                           |                                                             |                                                     |                                                                    |            |         |         
|                                                     |                                                                                      | Depreciation                                                |                                                     |                                                                    | 378,140    |         |         
|                                                     |                                                                                      | Change in net position of energy risk management activities |                                                     |                                                                    | (96,850    | )       |         
|                                                     |                                                                                      | Deferred income taxes and investment tax credits  net      |                                                     |                                                                    | 124,577    |         |         
|                                                     |                                                                                      | Gain on sale of investment in unconsolidated subsidiary     |                                                     |                                                                    |           |         |         
|                                                     |                                                                                      | Equity in earnings of unconsolidated subsidiaries           |                                                     |                                                                    | (2,266     | )       |         
|                                                     |                                                                                      | Allowance for equity funds used during construction         |                                                     |                                                                    | (8,628     | )       |         
|                                                     |                                                                                      | Regulatory assets deferrals                                 |                                                     |                                                                    | (141,324   | )       |         
|                                                     |                                                                                      | Regulatory assets amortization                              |                                                     |                                                                    | 118,508    |         |         
|                                                     |                                                                                      | Changes in current assets and current liabilities:          |                                                     |                                                                    |            |         |         
|                                                     |                                                                                      |                                                             |                                                     | Restricted deposits                                                |            |         | (1,409  
|                                                     |                                                                                      |                                                             |                                                     | Accounts and notes receivable, net of reserves on receivables sold |            |         | 492,183 
|                                                     |                                                                                      |                                                             |                                                     | Materials, supplies, and fuel                                      |            |         | (81,465 
|                                                     |                                                                                      |                                                             |                                                     | Accounts payable                                                   |            |         | (469,965
|                                                     |                                                                                      |                                                             |                                                     | Accrued taxes and interest                                         |            |         | (42,165 
|                                                     | Other items  net                                                                    |                                                             |                                                     | (17,203                                                            | )          |         | 554     
|                                                     |                                                                                      |                                                             |                                                     |                                                                    |            |         |         
|                                                     |                                                                                      |                                                             | Net cash provided by (used in) operating activities |                                                                    |            | 694,412 |         
|Financing Activities                                 |                                                                                      |                                                             |                                                     |                                                                    |            |         |         
|                                                     | Change in short-term debt                                                            |                                                             |                                                     | 27,129                                                             |            |         | 578,463 
|                                                     | Issuance of long-term debt                                                           |                                                             |                                                     | 940,785                                                            |            |         | 126,420 
|                                                     | Issuance of preferred trust securities                                               |                                                             |                                                     | 306,327                                                            |            |         |        
|                                                     | Redemption of long-term debt                                                         |                                                             |                                                     | (131,413                                                           | )          |         | (234,247
|                                                     | Retirement of preferred stock of subsidiaries                                        |                                                             |                                                     | (1                                                                 | )          |         | (29,393 
|                                                     | Issuance of common stock                                                             |                                                             |                                                     | 9,900                                                              |            |         | 1,770   
|                                                     | Dividends on common stock                                                            |                                                             |                                                     | (286,289                                                           | )          |         | (285,242
|                                                     |                                                                                      |                                                             |                                                     |                                                                    |            |         |         
|                                                     |                                                                                      |                                                             | Net cash provided by (used in) financing activities |                                                                    |            | 866,438 |         
|Investing Activities                                 |                                                                                      |                                                             |                                                     |                                                                    |            |         |         
|                                                     | Construction expenditures (less allowance for equity funds used during construction) |                                                             |                                                     | (846,159                                                           | )          |         | (514,193
|                                                     | Acquisitions and other investments                                                   |                                                             |                                                     | (696,678                                                           | )          |         | (250,444
|                                                     | Sale of investment in unconsolidated subsidiary                                      |                                                             |                                                     |                                                                   |            |         |        
|                                                     |                                                                                      |                                                             |                                                     |                                                                    |            |         |         
|                                                     |                                                                                      | Net cash provided by (used in) investing activities         |                                                     |                                                                    | (1,542,837 | )       |         
|Net increase (decrease) in cash and cash equivalents |                                                                                      |                                                             | 18,013                                              |                                                                    |            | 11,135  |         
|Cash and cash equivalents at beginning of period     |                                                                                      |                                                             | 93,054                                              |                                                                    |            | 81,919  |         
|                                                     |                                                                                      |                                                             |                                                     |                                                                    |            |         |         
|Cash and cash equivalents at end of period           |                                                                                      | $                                                           | 111,067                                             |                                                                    | $          | 93,054  |         
|                                                     |                                                                                      |                                                             |                                                     |                                                                    |            |         |         
|Supplemental Disclosure of Cash Flow Information     |                                                                                      |                                                             |                                                     |                                                                    |            |         |         
|                                                     | Cash paid during the year for:                                                       |                                                             |                                                     |                                                                    |            |         |         
|                                                     |                                                                                      | Interest (net of amount capitalized)                        |                                                     | $                                                                  | 264,213    |         | $       
|                                                     |                                                                                      | Income taxes                                                |                                                     | $                                                                  | 153,092    |         | $       

The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.

72

---



THE CINCINNATI GAS & ELECTRIC COMPANY  AND SUBSIDIARY COMPANIES

73

---

THE CINCINNATI GAS & ELECTRIC COMPANY  CONSOLIDATED STATEMENTS OF INCOME

|                                      |                                        | 2001 |                          | 2000      |   | 1999      |          
|------------------------------------- | -------------------------------------- | ---- | ------------------------ | --------- | - | --------- | ---------
|
|Operating Revenues                    |                                        |      |                          |           |   |           |          
|                                      | Electric                               |      | $                        | 4,097,347 |   | $         | 2,738,775
|                                      | Gas                                    |      |                          | 596,429   |   |           | 490,972  
|                                      |                                        |      |                          |           |   |           |          
|                                      |                                        |      | Total Operating Revenues |           |   | 4,693,776 |          
|Operating Expenses                    |                                        |      |                          |           |   |           |          
|                                      | Fuel and purchased and exchanged power |      |                          | 2,881,962 |   |           | 1,554,959
|                                      | Gas purchased                          |      |                          | 396,764   |   |           | 266,339  
|                                      | Operation and maintenance              |      |                          | 442,173   |   |           | 491,545  
|                                      | Depreciation                           |      |                          | 186,986   |   |           | 180,978  
|                                      | Taxes other than income taxes          |      |                          | 174,320   |   |           | 208,385  
|                                      |                                        |      |                          |           |   |           |          
|                                      |                                        |      | Total Operating Expenses |           |   | 4,082,205 |          
|Operating Income                      |                                        |      | 611,571                  |           |   | 527,541   |          
|Miscellaneous  Net                   |                                        |      | 4,657                    |           |   | (2,119    | )        
|Interest                              |                                        |      | 103,047                  |           |   | 99,204    |          
|Income Before Taxes                   |                                        |      | 513,181                  |           |   | 426,218   |          
|Income Taxes(Note 12)                 |                                        |      | 186,527                  |           |   | 159,398   |          
|                                      |                                        |      |                          |           |   |           |          
|Net Income                            |                                        | $    | 326,654                  |           | $ | 266,820   |          
|Preferred Dividend Requirement        |                                        |      | 846                      |           |   | 847       |          
|                                      |                                        |      |                          |           |   |           |          
|Net Income Applicable to Common Stock |                                        | $    | 325,808                  |           | $ | 265,973   |          
|                                      |                                        |      |                          |           |   |           |          

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.

74

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THE CINCINNATI GAS & ELECTRIC COMPANY  CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                 | December 31
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | -----------
|
|
|ASSETS                                   |                                                                                                                                                 |            
|Current Assets                           |                                                                                                                                                 |            
|                                         | Cash and cash equivalents                                                                                                                       |            
|                                         | Restricted deposits                                                                                                                             |            
|                                         | Notes receivable from affiliated companies                                                                                                      |            
|                                         | Accounts receivable less accumulated provision for doubtful accounts of $25,874 at December 31, 2001, and $19,044 at December 31, 2000 (Note 7) |            
|                                         | Accounts receivable from affiliated companies                                                                                                   |            
|                                         | Materials, supplies, and fuel  at average cost                                                                                                 |            
|                                         | Energy risk management current assets (Note 1(k))                                                                                               |            
|                                         | Prepayments and other                                                                                                                           |            
|                                         |                                                                                                                                                 |            
|                                         |                                                                                                                                                 |            
|Property, Plant, and Equipment  at Cost |                                                                                                                                                 |            
|                                         | Utility plant in service                                                                                                                        |            
|                                         |                                                                                                                                                 | Electric   
|                                         |                                                                                                                                                 | Gas        
|                                         |                                                                                                                                                 | Common     
|                                         |                                                                                                                                                 |            
|                                         |                                                                                                                                                 |            
|                                         | Construction work in progress                                                                                                                   |            
|                                         |                                                                                                                                                 |            
|                                         |                                                                                                                                                 |            
|                                         | Non-regulated property, plant, and equipment                                                                                                    |            
|                                         | Accumulated depreciation                                                                                                                        |            
|                                         |                                                                                                                                                 |            
|                                         |                                                                                                                                                 |            
|Other Assets                             |                                                                                                                                                 |            
|                                         | Regulatory assets (Note 1(c))                                                                                                                   |            
|                                         | Energy risk management non-current assets (Note 1(k))                                                                                           |            
|                                         | Other                                                                                                                                           |            
|                                         |                                                                                                                                                 |            
|                                         |                                                                                                                                                 |            
|Total Assets                             |                                                                                                                                                 | $          
|                                         |                                                                                                                                                 |            

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.

75

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THE CINCINNATI GAS & ELECTRIC COMPANY  CONSOLIDATED BALANCE SHEETS

|                                           |                                                                  | December 31                                                                                                                                  |          
|------------------------------------------ | ---------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ---------
|
|
|LIABILITIES AND SHAREHOLDER'S EQUITY       |                                                                  |                                                                                                                                              |          
|Current Liabilities                        |                                                                  |                                                                                                                                              |          
|                                           | Accounts payable                                                 |                                                                                                                                              | $        
|                                           | Accounts payable to affiliated companies                         |                                                                                                                                              |          
|                                           | Accrued taxes                                                    |                                                                                                                                              |          
|                                           | Accrued interest                                                 |                                                                                                                                              |          
|                                           | Notes payable and other short-term obligations (Note 6)          |                                                                                                                                              |          
|                                           | Notes payable to affiliated companies                            |                                                                                                                                              |          
|                                           | Long-term debt due within one year (Note 5)                      |                                                                                                                                              |          
|                                           | Energy risk management current liabilities (Note 1(k))           |                                                                                                                                              |          
|                                           | Other                                                            |                                                                                                                                              |          
|                                           |                                                                  |                                                                                                                                              |          
|                                           |                                                                  |                                                                                                                                              |          
|Non-Current Liabilities                    |                                                                  |                                                                                                                                              |          
|                                           | Long-term debt (Note 5)                                          |                                                                                                                                              |          
|                                           | Deferred income taxes (Note 12)                                  |                                                                                                                                              |          
|                                           | Unamortized investment tax credits                               |                                                                                                                                              |          
|                                           | Accrued pension and other postretirement benefit costs (Note 10) |                                                                                                                                              |          
|                                           | Energy risk management non-current liabilities (Note 1(k))       |                                                                                                                                              |          
|                                           | Other                                                            |                                                                                                                                              |          
|                                           |                                                                  |                                                                                                                                              |          
|                                           |                                                                  |                                                                                                                                              |          
|Total Liabilities                          |                                                                  |                                                                                                                                              | 3,602,168
|Cumulative Preferred Stock                 |                                                                  |                                                                                                                                              |          
|                                           | Not subject to mandatory redemption                              |                                                                                                                                              |          
|Common Stock Equity(Note 2)                |                                                                  |                                                                                                                                              |          
|                                           |                                                                  | Common Stock  $8.50 par value; authorized shares  120,000,000; outstanding shares  89,663,086 at December 31, 2001, and December 31, 2000 |          
|                                           |                                                                  | Paid-in capital                                                                                                                              |          
|                                           |                                                                  | Retained earnings                                                                                                                            |          
|                                           |                                                                  | Accumulated other comprehensive income (loss)                                                                                                |          
|                                           |                                                                  |                                                                                                                                              |          
|                                           |                                                                  |                                                                                                                                              |          
|Commitments and Contingencies(Note 13)     |                                                                  |                                                                                                                                              |          
|Total Liabilities and Shareholder's Equity |                                                                  | $                                                                                                                                            | 5,359,744
|                                           |                                                                  |                                                                                                                                              |          

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.

76

---



THE CINCINNATI GAS & ELECTRIC COMPANY  CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

|                                                           |                                                                | Common
Stock                                        |         | Paid-in
Capital |   | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income (Loss) |          | Total
Common
Stock
Equity |  
|---------------------------------------------------------- | -------------------------------------------------------------- | --------------------------------------------------- | ------- | --------------- | - | ----------------- | - | --------------------------------------------- | -------- | ------------------------- | -
|
|1999                                                       |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|Beginning balance                                          |                                                                | $                                                   | 762,136 |                 | $ | 553,926           |   | $                                             | 351,505  |                           | $
|Comprehensive income:                                      |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|                                                           | Net income                                                     |                                                     |         |                |   |                   |  |                                               |          | 233,576                   |  
|                                                           | Other comprehensive income (loss), net of tax effect of $(85)  |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|                                                           |                                                                | Minimum pension liability adjustment                |         |                 |  |                   |   |                                              |          |                           | 
|                                                           |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|                                                           | Total comprehensive income                                     |                                                     |         |                |   |                   |  |                                               |          |                          |  
|Dividends on preferred stock                               |                                                                |                                                     |        |                 |   |                  |   |                                               | (856     | )                         |  
|Dividends on common stock                                  |                                                                |                                                     |        |                 |   |                  |   |                                               | (250,100 | )                         |  
|Contribution from parent company for reallocation of taxes |                                                                |                                                     |        |                 |   | 8,920             |   |                                               |         |                           |  
|Other                                                      |                                                                |                                                     |        |                 |   | 5                 |   |                                               | 1,019    |                           |  
|                                                           |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|Ending balance                                             |                                                                | $                                                   | 762,136 |                 | $ | 562,851           |   | $                                             | 335,144  |                           | $
|2000                                                       |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|Comprehensive income:                                      |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|                                                           | Net income                                                     |                                                     |         |                |   |                   |  |                                               |          | 266,820                   |  
|                                                           | Other comprehensive income (loss), net of tax effect of $15    |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|                                                           |                                                                | Minimum pension liability adjustment                |         |                 |  |                   |   |                                              |          |                           | 
|                                                           |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|                                                           | Total comprehensive income                                     |                                                     |         |                |   |                   |  |                                               |          |                          |  
|Dividends on preferred stock                               |                                                                |                                                     |        |                 |   |                  |   |                                               | (847     | )                         |  
|Dividends on common stock                                  |                                                                |                                                     |        |                 |   |                  |   |                                               | (232,334 | )                         |  
|Contribution from parent company for reallocation of taxes |                                                                |                                                     |        |                 |   | 2,894             |   |                                               |         |                           |  
|Other                                                      |                                                                |                                                     |        |                 |   | 32                |   |                                               | 128      |                           |  
|                                                           |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|Ending balance                                             |                                                                | $                                                   | 762,136 |                 | $ | 565,777           |   | $                                             | 368,911  |                           | $
|2001                                                       |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|Comprehensive income:                                      |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|                                                           | Net income                                                     |                                                     |         |                |   |                   |  |                                               |          | 326,654                   |  
|                                                           | Other comprehensive income (loss), net of tax effect of $2,970 |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|                                                           |                                                                | Minimum pension liability adjustment                |         |                 |  |                   |   |                                              |          |                           | 
|                                                           |                                                                | Unrealized gain (loss) on investment trust          |         |                 |  |                   |   |                                              |          |                           | 
|                                                           |                                                                | Cumulative effect of change in accounting principle |         |                 |  |                   |   |                                              |          |                           | 
|                                                           |                                                                | Cash flow hedges(Note 1(l))                         |         |                 |  |                   |   |                                              |          |                           | 
|                                                           |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|                                                           | Total comprehensive income                                     |                                                     |         |                |   |                   |  |                                               |          |                          |  
|Dividends on preferred stock                               |                                                                |                                                     |        |                 |   |                  |   |                                               | (846     | )                         |  
|Dividends on common stock                                  |                                                                |                                                     |        |                 |   |                  |   |                                               | (286,269 | )                         |  
|Contribution from parent company for reallocation of taxes |                                                                |                                                     |        |                 |   | 6,149             |   |                                               |         |                           |  
|Other                                                      |                                                                |                                                     |        |                 |   |                  |   |                                               | 256      |                           |  
|                                                           |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  
|Ending balance                                             |                                                                | $                                                   | 762,136 |                 | $ | 571,926           |   | $                                             | 408,706  |                           | $
|                                                           |                                                                |                                                     |         |                 |   |                   |   |                                               |          |                           |  

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial
statements.

77

---



THE CINCINNATI GAS & ELECTRIC COMPANY  CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                      | 2001                                                        |                                                                    | 2000     |          | 1999     |         
|---------------------------------------------------- | ------------------------------------------------------------------------------------ | ----------------------------------------------------------- | ------------------------------------------------------------------ | -------- | -------- | -------- | --------
|
|Operating Activities                                 |                                                                                      |                                                             |                                                                    |          |          |          |         
|                                                     | Net income                                                                           |                                                             | $                                                                  | 326,654  |          | $        | 266,820 
|                                                     | Items providing or (using) cash currently:                                           |                                                             |                                                                    |          |          |          |         
|                                                     |                                                                                      | Depreciation                                                |                                                                    |          | 186,986  |          |         
|                                                     |                                                                                      | Deferred income taxes and investment tax credits  net      |                                                                    |          | 43,834   |          |         
|                                                     |                                                                                      | Change in net position of energy risk management activities |                                                                    |          | (67,979  | )        |         
|                                                     |                                                                                      | Allowance for equity funds used during construction         |                                                                    |          | (2,672   | )        |         
|                                                     |                                                                                      | Regulatory assets deferrals                                 |                                                                    |          | (116,365 | )        |         
|                                                     |                                                                                      | Regulatory assets amortization                              |                                                                    |          | 55,867   |          |         
|                                                     |                                                                                      | Changes in current assets and current liabilities:          |                                                                    |          |          |          |         
|                                                     |                                                                                      |                                                             | Restricted deposits                                                |          |          | (3,380   | )       
|                                                     |                                                                                      |                                                             | Accounts and notes receivable, net of reserves on receivables sold |          |          | 174,385  |         
|                                                     |                                                                                      |                                                             | Materials, supplies, and fuel                                      |          |          | (39,058  | )       
|                                                     |                                                                                      |                                                             | Accounts payable                                                   |          |          | (184,064 | )       
|                                                     |                                                                                      |                                                             | Accrued taxes and interest                                         |          |          | (37,209  | )       
|                                                     |                                                                                      | Other items  net                                           |                                                                    |          | (3,900   | )        |         
|                                                     |                                                                                      |                                                             |                                                                    |          |          |          |         
|                                                     |                                                                                      |                                                             | Net cash provided by (used in) operating activities                |          |          | 333,099  |         
|                                                     |                                                                                      |                                                             |                                                                    |          |          |          |         
|Financing Activities                                 |                                                                                      |                                                             |                                                                    |          |          |          |         
|                                                     | Change in short-term debt, including net affiliate notes                             |                                                             |                                                                    | 305,155  |          |          | 40,684  
|                                                     | Issuance of long-term debt                                                           |                                                             |                                                                    |         |          |          |        
|                                                     | Redemption of long-term debt                                                         |                                                             |                                                                    | (1,200   | )        |          |        
|                                                     | Retirement of preferred stock                                                        |                                                             |                                                                    |         |          |          | (168    
|                                                     | Dividends on preferred stock                                                         |                                                             |                                                                    | (845     | )        |          | (847    
|                                                     | Dividends on common stock                                                            |                                                             |                                                                    | (286,269 | )        |          | (232,334
|                                                     |                                                                                      |                                                             |                                                                    |          |          |          |         
|                                                     |                                                                                      |                                                             | Net cash provided by (used in) financing activities                |          |          | 16,841   |         
|                                                     |                                                                                      |                                                             |                                                                    |          |          |          |         
|Investing Activities                                 |                                                                                      |                                                             |                                                                    |          |          |          |         
|                                                     | Construction expenditures (less allowance for equity funds used during construction) |                                                             |                                                                    | (361,503 | )        |          | (260,127
|                                                     |                                                                                      |                                                             |                                                                    |          |          |          |         
|                                                     |                                                                                      |                                                             | Net cash provided by (used in) investing activities                |          |          | (361,503 | )       
|                                                     |                                                                                      |                                                             |                                                                    |          |          |          |         
|Net increase (decrease) in cash and cash equivalents |                                                                                      |                                                             | (11,563                                                            | )        |          | 11,083   |         
|Cash and cash equivalents at beginning of period     |                                                                                      |                                                             | 20,637                                                             |          |          | 9,554    |         
|                                                     |                                                                                      |                                                             |                                                                    |          |          |          |         
|Cash and cash equivalents at end of period           |                                                                                      | $                                                           | 9,074                                                              |          | $        | 20,637   |         
|                                                     |                                                                                      |                                                             |                                                                    |          |          |          |         
|Supplemental Disclosure of Cash Flow Information     |                                                                                      |                                                             |                                                                    |          |          |          |         
|                                                     | Cash paid during the year for:                                                       |                                                             |                                                                    |          |          |          |         
|                                                     |                                                                                      | Interest (net of amount capitalized)                        |                                                                    | $        | 108,079  |          | $       
|                                                     |                                                                                      | Income taxes                                                |                                                                    | $        | 147,471  |          | $       

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.

78

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THE CINCINNATI GAS & ELECTRIC COMPANY  CONSOLIDATED STATEMENTS OF CAPITALIZATION

|                                         |      | December 31                            |                                                                                                                                                       
|---------------------------------------- | ---- | -------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|Long-term Debt(excludes current portion) |      |                                        |                                                                                                                                                       
|                                         | CG&E |                                        |                                                                                                                                                       
|                                         |      | First Mortgage Bonds:                  |                                                                                                                                                       
|                                         |      |                                        | 71/4 % Series due September 1, 2002                                                                                                                   
|                                         |      |                                        | 6.45% Series due February 15, 2004                                                                                                                    
|                                         |      |                                        | 7.20% Series due October 1, 2023                                                                                                                      
|                                         |      |                                        | 5.45% Series due January 1, 2024 (Pollution Control)                                                                                                  
|                                         |      |                                        | 51/2 % Series due January 1, 2024 (Pollution Control)                                                                                                 
|                                         |      |                                        |                                                                                                                                                       
|                                         |      |                                        |                                                                                                                                                       
|                                         |      | Pollution Control Notes:               |                                                                                                                                                       
|                                         |      |                                        | 6.50% due November 15, 2022                                                                                                                           
|                                         |      | Other Long-term Debt:                  |                                                                                                                                                       
|                                         |      |                                        | Liquid Asset Notes with Coupon Exchange due October 1, 2007 (Executed interest rate swap set at 6.87% through maturity commencing at October 19, 2000)
|                                         |      |                                        | 6.40% Debentures due April 1, 2008                                                                                                                    
|                                         |      |                                        | 6.90% Debentures due June 1, 2025 (Redeemable at the option of the holders on June 1, 2005)                                                           
|                                         |      |                                        | 8.28% Junior Subordinated Debentures due July 1, 2025                                                                                                 
|                                         |      |                                        | 6.35% Debentures due June 15, 2038 (Interest rate resets June 15, 2003)                                                                               
|                                         |      |                                        |                                                                                                                                                       
|                                         |      |                                        |                                                                                                                                                       
|                                         |      | Unamortized Premium and Discount  Net |                                                                                                                                                       
|                                         |      |                                        |                                                                                                                                                       
|                                         |      |                                        |                                                                                                                                                       
|ULH&P                                    |      |                                        |                                                                                                                                                       
|                                         |      | Other Long-term Debt:                  |                                                                                                                                                       
|                                         |      |                                        | 6.11  % Debentures due December 8, 2003                                                                                                               
|                                         |      |                                        | 6.50  % Debentures due April 30, 2008                                                                                                                 
|                                         |      |                                        | 7.65  % Debentures due July 15, 2025                                                                                                                  
|                                         |      |                                        | 7.875% Debentures due September 15, 2009                                                                                                              
|                                         |      |                                        |                                                                                                                                                       
|                                         |      |                                        |                                                                                                                                                       
|                                         |      | Unamortized Premium and Discount  Net |                                                                                                                                                       
|                                         |      |                                        |                                                                                                                                                       
|                                         |      |                                        |                                                                                                                                                       
|Total CG&E Consolidated Long-term Debt   |      | $                                      | 1,105,333                                                                                                                                             
|                                         |      |                                        |                                                                                                                                                       

79

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THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (cont.)

|Cumulative Preferred Stock |                                                                                                                                              |                           |                      |         |           |            |         |           |          
|-------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | -------------------- | ------- | --------- | ---------- | ------- | --------- | ---------
|
|
|
|
|$100                       |                                                                                                                                              | 6,000,000                 |                      | 204,859 |           | 4% - 43/4% |         | No        |          
|Common Stock Equity        |                                                                                                                                              |                           |                      |         |           |            |        
|                           | Common Stock  $8.50 par value; authorized shares  120,000,000; outstanding shares  89,663,086 at December 31, 2001, and December 31, 2000 |                           | $                    | 762,136 |           | $          | 762,136 |          
|                           | Paid-in capital                                                                                                                              |                           |                      | 571,926 |           |            | 565,777 |          
|                           | Retained earnings                                                                                                                            |                           |                      | 408,706 |           |            | 368,911 |          
|                           | Accumulated other comprehensive income (loss)                                                                                                |                           |                      | (5,678  | )         |            | (994    | )        
|                           |                                                                                                                                              |                           |                      |         |           |            |         |           |          
|                           |                                                                                                                                              | Total Common Stock Equity |                      |         | 1,737,090 |            |         | 1,695,830 |          
|                           |                                                                                                                                              |                           | Total Capitalization |         | $         | 2,862,909  |         | $         | 2,921,377
|                           |                                                                                                                                              |                           |                      |         |           |            |         |           |          

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.

80

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PSI ENERGY, INC.  AND SUBSIDIARY COMPANY

81

---

PSI ENERGY, INC.  CONSOLIDATED STATEMENTS OF INCOME

|                                      |                                        | 2001 |                          | 2000      |   | 1999     
|------------------------------------- | -------------------------------------- | ---- | ------------------------ | --------- | - | ---------
|
|Operating Revenues                    |                                        |      |                          |           |   |          
|                                      | Electric                               |      | $                        | 4,075,024 |   | $        
|Operating Expenses                    |                                        |      |                          |           |   |          
|                                      | Fuel and purchased and exchanged power |      |                          | 3,132,494 |   |          
|                                      | Operation and maintenance              |      |                          | 413,275   |   |          
|                                      | Depreciation                           |      |                          | 149,467   |   |          
|                                      | Taxes other than income taxes          |      |                          | 49,955    |   |          
|                                      |                                        |      |                          |           |   |          
|                                      |                                        |      | Total Operating Expenses |           |   | 3,745,191
|Operating Income                      |                                        |      | 329,833                  |           |   | 297,472  
|Miscellaneous  Net                   |                                        |      | 19,541                   |           |   | 4,723    
|Interest                              |                                        |      | 80,955                   |           |   | 78,250   
|Income Before Taxes                   |                                        |      | 268,419                  |           |   | 223,945  
|Income Taxes(Note 12)                 |                                        |      | 106,086                  |           |   | 88,547   
|                                      |                                        |      |                          |           |   |          
|Net Income                            |                                        | $    | 162,333                  |           | $ | 135,398  
|Preferred Dividend Requirement        |                                        |      | 2,587                    |           |   | 3,738    
|                                      |                                        |      |                          |           |   |          
|Net Income Applicable to Common Stock |                                        | $    | 159,746                  |           | $ | 131,660  
|                                      |                                        |      |                          |           |   |          

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.

82

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PSI ENERGY, INC.  CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                               | December 31        
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
|
|
|ASSETS                                   |                                                                                                                                               |                    
|Current Assets                           |                                                                                                                                               |                    
|                                         | Cash and cash equivalents                                                                                                                     |                    
|                                         | Restricted deposits                                                                                                                           |                    
|                                         | Notes receivable                                                                                                                              |                    
|                                         | Notes receivable from affiliated companies                                                                                                    |                    
|                                         | Accounts receivable less accumulated provision for doubtful accounts of $6,773 at December 31, 2001, and $9,317 at December 31, 2000 (Note 7) |                    
|                                         | Accounts receivable from affiliated companies                                                                                                 |                    
|                                         | Materials, supplies, and fuel  at average cost                                                                                               |                    
|                                         | Energy risk management current assets (Note 1(k))                                                                                             |                    
|                                         | Prepayments and other                                                                                                                         |                    
|                                         |                                                                                                                                               |                    
|                                         |                                                                                                                                               |                    
|Property, Plant, and Equipment  at Cost |                                                                                                                                               |                    
|                                         | Utility plant in service                                                                                                                      |                    
|                                         | Construction work in progress                                                                                                                 |                    
|                                         |                                                                                                                                               |                    
|                                         |                                                                                                                                               | Total Utility Plant
|                                         | Accumulated depreciation                                                                                                                      |                    
|                                         |                                                                                                                                               |                    
|                                         |                                                                                                                                               |                    
|Other Assets                             |                                                                                                                                               |                    
|                                         | Regulatory assets (Note 1(c))                                                                                                                 |                    
|                                         | Energy risk management non-current assets (Note 1(k))                                                                                         |                    
|                                         | Other investments                                                                                                                             |                    
|                                         | Other                                                                                                                                         |                    
|                                         |                                                                                                                                               |                    
|                                         |                                                                                                                                               |                    
|Total Assets                             |                                                                                                                                               | $                  
|                                         |                                                                                                                                               |                    

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.

83

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PSI ENERGY, INC.  CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                                  | December 31 |          
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ---------
|
|
|LIABILITIES AND SHAREHOLDER'S EQUITY       |                                                                                                                                                                  |             |          
|Current Liabilities                        |                                                                                                                                                                  |             |          
|                                           | Accounts payable                                                                                                                                                 |             | $        
|                                           | Accounts payable to affiliated companies                                                                                                                         |             |          
|                                           | Accrued taxes                                                                                                                                                    |             |          
|                                           | Accrued interest                                                                                                                                                 |             |          
|                                           | Notes payable and other short-term obligations (Note 6)                                                                                                          |             |          
|                                           | Notes payable to affiliated companies                                                                                                                            |             |          
|                                           | Long-term debt due within one year (Note 5)                                                                                                                      |             |          
|                                           | Energy risk management current liabilities (Note 1(k))                                                                                                           |             |          
|                                           | Other                                                                                                                                                            |             |          
|                                           |                                                                                                                                                                  |             |          
|                                           |                                                                                                                                                                  |             |          
|Non-Current Liabilities                    |                                                                                                                                                                  |             |          
|                                           | Long-term debt (Note 5)                                                                                                                                          |             |          
|                                           | Deferred income taxes (Note 12)                                                                                                                                  |             |          
|                                           | Unamortized investment tax credits                                                                                                                               |             |          
|                                           | Accrued pension and other postretirement benefit costs (Note 10)                                                                                                 |             |          
|                                           | Energy risk management non-current liabilities (Note 1(k))                                                                                                       |             |          
|                                           | Other                                                                                                                                                            |             |          
|                                           |                                                                                                                                                                  |             |          
|                                           |                                                                                                                                                                  |             |          
|Total Liabilities                          |                                                                                                                                                                  |             | 3,232,948
|Cumulative Preferred Stock(Note 3)         |                                                                                                                                                                  |             |          
|                                           | Not subject to mandatory redemption                                                                                                                              |             |          
|Common Stock Equity(Note 2)                |                                                                                                                                                                  |             |          
|                                           | Common Stock  without par value; $.01 stated value; authorized shares  60,000,000; outstanding shares  53,913,701 at December 31, 2001, and December 31, 2000 |             |          
|                                           | Paid-in capital                                                                                                                                                  |             |          
|                                           | Retained earnings                                                                                                                                                |             |          
|                                           | Accumulated other comprehensive income (loss)                                                                                                                    |             |          
|                                           |                                                                                                                                                                  |             |          
|                                           |                                                                                                                                                                  |             |          
|Commitments and Contingencies(Note 13)     |                                                                                                                                                                  |             |          
|Total Liabilities and Shareholder's Equity |                                                                                                                                                                  | $           | 4,570,782
|                                           |                                                                                                                                                                  |             |          

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.

84

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PSI ENERGY, INC.  CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

|                                                           |                                                                | Common
Stock                                |     | Paid-in
Capital |   | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income (Loss) |         | Total
Common
Stock
Equity |  
|---------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------- | --- | --------------- | - | ----------------- | - | --------------------------------------------- | ------- | ------------------------- | -
|
|1999                                                       |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|Beginning balance                                          |                                                                | $                                           | 539 |                 | $ | 410,739           |   | $                                             | 564,865 |                           | $
|Comprehensive income:                                      |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|                                                           | Net income                                                     |                                             |     |                |   |                   |  |                                               |         | 117,199                   |  
|                                                           | Other comprehensive income (loss), net of tax effect of $(418) |                                             |     |                 |   |                   |   |                                               |         |                           |  
|                                                           |                                                                | Minimum pension liability adjustment        |     |                 |  |                   |   |                                              |         |                           | 
|                                                           |                                                                | Unrealized gain (loss) on investment trust  |     |                 |  |                   |   |                                              |         |                           | 
|                                                           |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|                                                           | Total comprehensive income                                     |                                             |     |                |   |                   |  |                                               |         |                          |  
|Dividends on preferred stock                               |                                                                |                                             |    |                 |   |                  |   |                                               | (4,601  | )                         |  
|Dividends on common stock                                  |                                                                |                                             |    |                 |   |                  |   |                                               | (35,900 | )                         |  
|Contribution from parent company for reallocation of taxes |                                                                |                                             |    |                 |   | 457               |   |                                               |        |                           |  
|Other                                                      |                                                                |                                             |    |                 |   | 2                 |   |                                               | 1,006   |                           |  
|                                                           |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|Ending balance                                             |                                                                | $                                           | 539 |                 | $ | 411,198           |   | $                                             | 642,569 |                           | $
|2000                                                       |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|Comprehensive income:                                      |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|                                                           | Net income                                                     |                                             |     |                |   |                   |  |                                               |         | 135,398                   |  
|                                                           | Other comprehensive income (loss), net of tax effect of $584   |                                             |     |                 |   |                   |   |                                               |         |                           |  
|                                                           |                                                                | Minimum pension liability adjustment        |     |                 |  |                   |   |                                              |         |                           | 
|                                                           |                                                                | Unrealized gain (loss) on investment trust  |     |                 |  |                   |   |                                              |         |                           | 
|                                                           |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|                                                           | Total comprehensive income                                     |                                             |     |                |   |                   |  |                                               |         |                          |  
|Dividends on preferred stock                               |                                                                |                                             |    |                 |   |                  |   |                                               | (3,738  | )                         |  
|Dividends on common stock                                  |                                                                |                                             |    |                 |   |                  |   |                                               | (54,000 | )                         |  
|Contribution from parent company for reallocation of taxes |                                                                |                                             |    |                 |   | 1,989             |   |                                               |        |                           |  
|Other                                                      |                                                                |                                             |    |                 |   | 336               |   |                                               | (76     | )                         |  
|                                                           |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|Ending balance                                             |                                                                | $                                           | 539 |                 | $ | 413,523           |   | $                                             | 720,153 |                           | $
|2001                                                       |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|Comprehensive income:                                      |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|                                                           | Net income                                                     |                                             |     |                |   |                   |  |                                               |         | 162,333                   |  
|                                                           | Other comprehensive income (loss), net of tax effect of $538   |                                             |     |                 |   |                   |   |                                               |         |                           |  
|                                                           |                                                                | Minimum pension liability adjustment        |     |                 |  |                   |   |                                              |         |                           | 
|                                                           |                                                                | Unrealized gain (loss) on investment trusts |     |                 |  |                   |   |                                              |         |                           | 
|                                                           |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|                                                           | Total comprehensive income                                     |                                             |     |                |   |                   |  |                                               |         |                          |  
|Dividends on preferred stock                               |                                                                |                                             |    |                 |   |                  |   |                                               | (2,587  | )                         |  
|Contribution from parent company for reallocation of taxes |                                                                |                                             |    |                 |   | 2,894             |   |                                               |        |                           |  
|Other                                                      |                                                                |                                             |    |                 |   | (3                | ) |                                               | 230     |                           |  
|                                                           |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  
|Ending balance                                             |                                                                | $                                           | 539 |                 | $ | 416,414           |   | $                                             | 880,129 |                           | $
|                                                           |                                                                |                                             |     |                 |   |                   |   |                                               |         |                           |  

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.

85

---



PSI ENERGY, INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                      | 2001                                                        |                                                                    | 2000     |         | 1999     |         
|---------------------------------------------------- | ------------------------------------------------------------------------------------ | ----------------------------------------------------------- | ------------------------------------------------------------------ | -------- | ------- | -------- | --------
|
|Operating Activities                                 |                                                                                      |                                                             |                                                                    |          |         |          |         
|                                                     | Net income                                                                           |                                                             | $                                                                  | 162,333  |         | $        | 135,398 
|                                                     | Items providing or (using) cash currently:                                           |                                                             |                                                                    |          |         |          |         
|                                                     |                                                                                      | Depreciation                                                |                                                                    |          | 149,467 |          |         
|                                                     |                                                                                      | Deferred income taxes and investment tax credits  net      |                                                                    |          | 41,543  |          |         
|                                                     |                                                                                      | Change in net position of energy risk management activities |                                                                    |          | (33,158 | )        |         
|                                                     |                                                                                      | Allowance for equity funds used during construction         |                                                                    |          | (5,956  | )        |         
|                                                     |                                                                                      | Regulatory assets deferrals                                 |                                                                    |          | (24,959 | )        |         
|                                                     |                                                                                      | Regulatory assets amortization                              |                                                                    |          | 62,641  |          |         
|                                                     |                                                                                      | Changes in current assets and current liabilities:          |                                                                    |          |         |          |         
|                                                     |                                                                                      |                                                             | Restricted deposits                                                |          |         | (178     | )       
|                                                     |                                                                                      |                                                             | Accounts and notes receivable, net of reserves on receivables sold |          |         | 119,311  |         
|                                                     |                                                                                      |                                                             | Materials, supplies, and fuel                                      |          |         | (33,823  | )       
|                                                     |                                                                                      |                                                             | Accounts payable                                                   |          |         | (84,577  | )       
|                                                     |                                                                                      |                                                             | Accrued taxes and interest                                         |          |         | 21,374   |         
|                                                     | Other items  net                                                                    |                                                             |                                                                    | 14,153   |         |          | 34,064  
|                                                     |                                                                                      |                                                             |                                                                    |          |         |          |         
|                                                     |                                                                                      |                                                             | Net cash provided by (used in) operating activities                |          |         | 388,171  |         
|Financing Activities                                 |                                                                                      |                                                             |                                                                    |          |         |          |         
|                                                     | Change in short-term debt, including net affiliate notes                             |                                                             |                                                                    | (195,912 | )       |          | 143,030 
|                                                     | Issuance of long-term debt                                                           |                                                             |                                                                    | 322,471  |         |          | 53,075  
|                                                     | Redemption of long-term debt                                                         |                                                             |                                                                    | (89,248  | )       |          | (187,097
|                                                     | Retirement of preferred stock                                                        |                                                             |                                                                    | (1       | )       |          | (29,225 
|                                                     | Dividends on preferred stock                                                         |                                                             |                                                                    | (2,587   | )       |          | (3,738  
|                                                     | Dividends on common stock                                                            |                                                             |                                                                    |         |         |          | (54,000 
|                                                     |                                                                                      |                                                             |                                                                    |          |         |          |         
|                                                     |                                                                                      |                                                             | Net cash provided by (used in) financing activities                |          |         | 34,723   |         
|Investing Activities                                 |                                                                                      |                                                             |                                                                    |          |         |          |         
|                                                     | Construction expenditures (less allowance for equity funds used during construction) |                                                             |                                                                    | (414,047 | )       |          | (259,394
|                                                     | Other investments                                                                    |                                                             |                                                                    | (8,571   | )       |          | (9,297  
|                                                     |                                                                                      |                                                             |                                                                    |          |         |          |         
|                                                     |                                                                                      |                                                             | Net cash provided by (used in) investing activities                |          |         | (422,618 | )       
|Net increase (decrease) in cash and cash equivalents |                                                                                      |                                                             | 276                                                                |          |         | (7,531   | )       
|Cash and cash equivalents at beginning of period     |                                                                                      |                                                             | 1,311                                                              |          |         | 8,842    |         
|                                                     |                                                                                      |                                                             |                                                                    |          |         |          |         
|Cash and cash equivalents at end of period           |                                                                                      | $                                                           | 1,587                                                              |          | $       | 1,311    |         
|                                                     |                                                                                      |                                                             |                                                                    |          |         |          |         
|Supplemental Disclosure of Cash Flow Information     |                                                                                      |                                                             |                                                                    |          |         |          |         
|                                                     | Cash paid during the year for:                                                       |                                                             |                                                                    |          |         |          |         
|                                                     |                                                                                      | Interest (net of amount capitalized)                        |                                                                    | $        | 84,306  |          | $       
|                                                     |                                                                                      | Income taxes                                                |                                                                    | $        | 41,419  |          | $       

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.

86

---



PSI ENERGY, INC.  CONSOLIDATED STATEMENTS OF CAPITALIZATION

|                                         |                                        | December 31                                                                                       |                                                                                                   
|---------------------------------------- | -------------------------------------- | ------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------
|
|
|Long-term Debt(excludes current portion) |                                        |                                                                                                   |                                                                                                   
|                                         | First Mortgage Bonds:                  |                                                                                                   |                                                                                                   
|                                         |                                        | Series ZZ, 53/4% due February 15, 2028 (Pollution Control)                                        |                                                                                                   
|                                         |                                        | Series AAA, 71/8% due February 1, 2024                                                            |                                                                                                   
|                                         |                                        | Series BBB, 8.0% due July 15, 2009                                                                |                                                                                                   
|                                         |                                        | Series CCC, 8.85% due January 15, 2022                                                            |                                                                                                   
|                                         |                                        | Series DDD, 8.31% due September 1, 2032                                                           |                                                                                                   
|                                         |                                        | Series EEE, 6.65% due June 15, 2006                                                               |                                                                                                   
|                                         |                                        |                                                                                                   |                                                                                                   
|                                         |                                        |                                                                                                   |                                                                                                   
|                                         | Secured Medium-term Notes:             |                                                                                                   |                                                                                                   
|                                         |                                        | Series A, 8.37% to 8.81%, due November 8, 2006 to June 1, 2022                                    |                                                                                                   
|                                         |                                        | Series B, 5.93% to 8.24%, due September 17, 2003 to August 22, 2022                               |                                                                                                   
|                                         |                                        |                                                                                                   |                                                                                                   
|                                         |                                        |                                                                                                   | (Series A and B, 7.105% weighted average interest rate and 8 year weighted average remaining life)
|                                         |                                        |                                                                                                   |                                                                                                   
|                                         | Other Long-term Debt:                  |                                                                                                   |                                                                                                   
|                                         |                                        | Series 2000A, Pollution Control Revenue Refunding Bond, due May 1, 2035                           |                                                                                                   
|                                         |                                        | Series 2000B, Pollution Control Revenue Refunding Bond, due April 1, 2022                         |                                                                                                   
|                                         |                                        | 6.35% Debentures due November 15, 2006                                                            |                                                                                                   
|                                         |                                        | 6.00% Debentures due December 14, 2016 (Note 5)                                                   |                                                                                                   
|                                         |                                        | 6.50% Synthetic Putable Yield Securities due August 1, 2026 (Interest rate resets August 1, 2005) |                                                                                                   
|                                         |                                        | 7.25% Junior Maturing Principal Securities due March 15, 2028                                     |                                                                                                   
|                                         |                                        | 6.00% Rural Utilities Service (RUS) Obligation payable in annual installments                     |                                                                                                   
|                                         |                                        | 6.52% Senior Notes due March 15, 2009                                                             |                                                                                                   
|                                         |                                        | 7.85% Debentures due October 15, 2007                                                             |                                                                                                   
|                                         |                                        |                                                                                                   |                                                                                                   
|                                         |                                        |                                                                                                   |                                                                                                   
|                                         | Unamortized Premium and Discount  Net |                                                                                                   |                                                                                                   
|                                         |                                        |                                                                                                   |                                                                                                   
|                                         |                                        |                                                                                                   |                                                                                                   

87

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PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION (cont.)

|Cumulative Preferred Stock |                                                                                                                                                                   |                           |                      |         |           |               |         |           |          
|-------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | -------------------- | ------- | --------- | ------------- | ------- | --------- | ---------
|
|
|
|
|$100                       |                                                                                                                                                                   | 5,000,000                 |                      | 347,581 |           | 31/2% - 67/8% |         | No        |          
|$25                        |                                                                                                                                                                   | 5,000,000                 |                      | 303,544 |           | 4.16%  4.32% |         | No        |          
|                           |                                                                                                                                                                   |                           |                      |         |           |               |         |           |          
|                           |                                                                                                                                                                   | Total Preferred Stock     |                      |         | 42,347    |               |         | 42,348    |          
|Common Stock Equity        |                                                                                                                                                                   |                           |                      |         |           |               |        
|                           | Common Stock  without par value; $0.01 stated value; authorized shares  60,000,000; outstanding shares  53,913,701 at December 31, 2001, and December 31, 2000 |                           | $                    | 539     |           | $             | 539     |          
|                           | Paid-in capital                                                                                                                                                   |                           |                      | 416,414 |           |               | 413,523 |          
|                           | Retained earnings                                                                                                                                                 |                           |                      | 880,129 |           |               | 720,153 |          
|                           | Accumulated other comprehensive income (loss)                                                                                                                     |                           |                      | (1,595  | )         |               | (520    | )        
|                           |                                                                                                                                                                   |                           |                      |         |           |               |         |           |          
|                           |                                                                                                                                                                   | Total Common Stock Equity |                      |         | 1,295,487 |               |         | 1,133,695 |          
|                           |                                                                                                                                                                   |                           | Total Capitalization |         | $         | 2,662,923     |         | $         | 2,250,298
|                           |                                                                                                                                                                   |                           |                      |         |           |               |         |           |          

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.

88

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THE UNION LIGHT, HEAT  AND POWER COMPANY

89

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THE UNION LIGHT, HEAT AND POWER COMPANY  STATEMENTS OF INCOME

|                         |                                                                  | 2001 |         | 2000    |   | 1999    |        
|------------------------ | ---------------------------------------------------------------- | ---- | ------- | ------- | - | ------- | -------
|
|Operating Revenues       |                                                                  |      |         |         |   |         |        
|                         | Electric                                                         |      | $       | 230,960 |   | $       | 225,601
|                         | Gas                                                              |      |         | 109,333 |   |         | 91,950 
|                         |                                                                  |      |         |         |   |         |        
|Total Operating Revenues |                                                                  |      | 340,293 |         |   | 317,551 |        
|Operating Expenses       |                                                                  |      |         |         |   |         |        
|                         | Electricity purchased from parent company for resale (Note 1(o)) |      |         | 151,562 |   |         | 159,915
|                         | Gas purchased                                                    |      |         | 72,593  |   |         | 51,591 
|                         | Operation and maintenance                                        |      |         | 39,501  |   |         | 40,699 
|                         | Depreciation                                                     |      |         | 17,039  |   |         | 15,685 
|                         | Taxes other than income taxes                                    |      |         | 3,901   |   |         | 3,938  
|                         |                                                                  |      |         |         |   |         |        
|Total Operating Expenses |                                                                  |      | 284,596 |         |   | 271,828 |        
|Operating Income         |                                                                  |      | 55,697  |         |   | 45,723  |        
|Miscellaneous  Net      |                                                                  |      | 239     |         |   | (982    | )      
|Interest                 |                                                                  |      | 6,313   |         |   | 6,308   |        
|Income Before Taxes      |                                                                  |      | 49,623  |         |   | 38,433  |        
|Income Taxes(Note 12)    |                                                                  |      | 13,699  |         |   | 13,801  |        
|                         |                                                                  |      |         |         |   |         |        
|Net Income               |                                                                  | $    | 35,924  |         | $ | 24,632  |        
|                         |                                                                  |      |         |         |   |         |        

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements.

90

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THE UNION LIGHT, HEAT AND POWER COMPANY  BALANCE SHEETS

|                                         |                                                                                                                                               | December 31
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | -----------
|
|
|ASSETS                                   |                                                                                                                                               |            
|Current Assets                           |                                                                                                                                               |            
|                                         | Cash and cash equivalents                                                                                                                     |            
|                                         | Accounts receivable less accumulated provision for doubtful accounts of $1,196 at December 31, 2001, and $1,492 at December 31, 2000 (Note 7) |            
|                                         | Accounts receivable from affiliated companies                                                                                                 |            
|                                         | Materials, supplies, and fuel  at average cost                                                                                               |            
|                                         | Prepayments and other                                                                                                                         |            
|                                         |                                                                                                                                               |            
|                                         |                                                                                                                                               |            
|Property, Plant, and Equipment  at Cost |                                                                                                                                               |            
|                                         | Utility plant in service                                                                                                                      |            
|                                         |                                                                                                                                               | Electric   
|                                         |                                                                                                                                               | Gas        
|                                         |                                                                                                                                               | Common     
|                                         |                                                                                                                                               |            
|                                         |                                                                                                                                               |            
|                                         | Construction work in progress                                                                                                                 |            
|                                         |                                                                                                                                               |            
|                                         |                                                                                                                                               |            
|                                         | Accumulated depreciation                                                                                                                      |            
|                                         |                                                                                                                                               |            
|                                         |                                                                                                                                               |            
|Other Assets                             |                                                                                                                                               |            
|                                         | Regulatory assets (Note 1(c))                                                                                                                 |            
|                                         | Other                                                                                                                                         |            
|                                         |                                                                                                                                               |            
|                                         |                                                                                                                                               |            
|Total Assets                             |                                                                                                                                               | $          
|                                         |                                                                                                                                               |            

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements.

91

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THE UNION LIGHT, HEAT AND POWER COMPANY  BALANCE SHEETS

|                                           |                                                                                                                                          | December 31 |        
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- | ----------- | -------
|
|
|LIABILITIES AND SHAREHOLDER'S EQUITY       |                                                                                                                                          |             |        
|Current Liabilities                        |                                                                                                                                          |             |        
|                                           | Accounts payable                                                                                                                         |             | $      
|                                           | Accounts payable to affiliated companies                                                                                                 |             |        
|                                           | Accrued taxes                                                                                                                            |             |        
|                                           | Accrued interest                                                                                                                         |             |        
|                                           | Notes payable to affiliated companies                                                                                                    |             |        
|                                           | Other                                                                                                                                    |             |        
|                                           |                                                                                                                                          |             |        
|                                           |                                                                                                                                          |             |        
|Non-Current Liabilities                    |                                                                                                                                          |             |        
|                                           | Long-term debt (Note 5)                                                                                                                  |             |        
|                                           | Deferred income taxes (Note 12)                                                                                                          |             |        
|                                           | Unamortized investment tax credits                                                                                                       |             |        
|                                           | Accrued pension and other postretirement benefit costs (Note 10)                                                                         |             |        
|                                           | Amounts due to customers  income taxes                                                                                                  |             |        
|                                           | Other                                                                                                                                    |             |        
|                                           |                                                                                                                                          |             |        
|                                           |                                                                                                                                          |             |        
|Total Liabilities                          |                                                                                                                                          |             | 204,887
|Common Stock Equity(Note 2)                |                                                                                                                                          |             |        
|                                           | Common Stock  $15.00 par value; authorized shares  1,000,000; outstanding shares  585,333 at December 31, 2001, and December 31, 2000 |             |        
|                                           | Paid-in capital                                                                                                                          |             |        
|                                           | Retained earnings                                                                                                                        |             |        
|                                           | Accumulated other comprehensive income (loss)                                                                                            |             |        
|                                           |                                                                                                                                          |             |        
|                                           |                                                                                                                                          |             |        
|Commitments and Contingencies(Note 13)     |                                                                                                                                          |             |        
|Total Liabilities and Shareholder's Equity |                                                                                                                                          | $           | 377,090
|                                           |                                                                                                                                          |             |        

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements.

92

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THE UNION LIGHT, HEAT AND POWER COMPANY  STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

|                                                   |                                                                                                 | Common
Stock |       | Paid-in
Capital |   | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income (Loss) |         | Total
Common
Stock
Equity |  
|-------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ------------ | ----- | --------------- | - | ----------------- | - | --------------------------------------------- | ------- | ------------------------- | -
|
|1999                                               |                                                                                                 |              |       |                 |   |                   |   |                                               |         |                           |  
|Beginning balance                                  |                                                                                                 | $            | 8,780 |                 | $ | 19,525            |   | $                                             | 100,513 |                           | $
|Net income                                         |                                                                                                 |              |      |                 |   |                  |   |                                               | 12,274  |                           |  
|Dividends on common stock                          |                                                                                                 |              |      |                 |   |                  |   |                                               | (9,659  | )                         |  
|Contribution from parent for reallocation of taxes |                                                                                                 |              |      |                 |   | 617               |   |                                               |        |                           |  
|                                                   |                                                                                                 |              |       |                 |   |                   |   |                                               |         |                           |  
|Ending balance                                     |                                                                                                 | $            | 8,780 |                 | $ | 20,142            |   | $                                             | 103,128 |                           | $
|2000                                               |                                                                                                 |              |       |                 |   |                   |   |                                               |         |                           |  
|Net income                                         |                                                                                                 |              |      |                 |   |                  |   |                                               | 24,632  |                           |  
|Dividends on common stock                          |                                                                                                 |              |      |                 |   |                  |   |                                               | (9,657  | )                         |  
|Contribution from parent for reallocation of taxes |                                                                                                 |              |      |                 |   | 163               |   |                                               |        |                           |  
|                                                   |                                                                                                 |              |       |                 |   |                   |   |                                               |         |                           |  
|Ending balance                                     |                                                                                                 | $            | 8,780 |                 | $ | 20,305            |   | $                                             | 118,103 |                           | $
|2001                                               |                                                                                                 |              |       |                 |   |                   |   |                                               |         |                           |  
|Comprehensive income:                              |                                                                                                 |              |       |                 |   |                   |   |                                               |         |                           |  
|                                                   | Net income                                                                                      |              |       |                |   |                   |  |                                               |         | 35,924                    |  
|                                                   | Other comprehensive income (loss), net of tax effect of $5 Minimum pension liability adjustment |              |       |                |   |                   |  |                                               |         |                          |  
|                                                   |                                                                                                 |              |       |                 |   |                   |   |                                               |         |                           |  
|                                                   | Total comprehensive income (loss)                                                               |              |       |                 |   |                   |   |                                               |         |                           |  
|Dividends on common stock                          |                                                                                                 |              |      |                 |   |                  |   |                                               | (11,707 | )                         |  
|Contribution from parent for reallocation of taxes |                                                                                                 |              |      |                 |   | 806               |   |                                               |        |                           |  
|                                                   |                                                                                                 |              |       |                 |   |                   |   |                                               |         |                           |  
|Ending balance                                     |                                                                                                 | $            | 8,780 |                 | $ | 21,111            |   | $                                             | 142,320 |                           | $
|                                                   |                                                                                                 |              |       |                 |   |                   |   |                                               |         |                           |  

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements.

93

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THE UNION LIGHT, HEAT AND POWER COMPANY  STATEMENTS OF CASH FLOWS

|                                                     |                                                                                      | 2001                                                   |                                                     | 2000                                                               |        | 1999    |        
|---------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------------ | --------------------------------------------------- | ------------------------------------------------------------------ | ------ | ------- | -------
|
|Operating Activities                                 |                                                                                      |                                                        |                                                     |                                                                    |        |         |        
|                                                     | Net income                                                                           |                                                        | $                                                   | 35,924                                                             |        | $       | 24,632 
|                                                     | Items providing or (using) cash currently:                                           |                                                        |                                                     |                                                                    |        |         |        
|                                                     |                                                                                      | Depreciation                                           |                                                     |                                                                    | 17,039 |         |        
|                                                     |                                                                                      | Deferred income taxes and investment tax credits  net |                                                     |                                                                    | (7,116 | )       |        
|                                                     |                                                                                      | Allowance for equity funds used during construction    |                                                     |                                                                    | (143   | )       |        
|                                                     |                                                                                      | Regulatory assets deferrals                            |                                                     |                                                                    | 1,098  |         |        
|                                                     |                                                                                      | Regulatory assets amortization                         |                                                     |                                                                    | 901    |         |        
|                                                     |                                                                                      | Changes in current assets and current liabilities:     |                                                     |                                                                    |        |         |        
|                                                     |                                                                                      |                                                        |                                                     | Accounts and notes receivable, net of reserves on receivables sold |        |         | 12,112 
|                                                     |                                                                                      |                                                        |                                                     | Materials, supplies, and fuel                                      |        |         | (4,535 
|                                                     |                                                                                      |                                                        |                                                     | Accounts payable                                                   |        |         | (20,325
|                                                     |                                                                                      |                                                        |                                                     | Accrued taxes and interest                                         |        |         | 12,239 
|                                                     |                                                                                      | Other items  net                                      |                                                     |                                                                    | (681   | )       |        
|                                                     |                                                                                      |                                                        |                                                     |                                                                    |        |         |        
|                                                     |                                                                                      |                                                        | Net cash provided by (used in) operating activities |                                                                    |        | 46,513  |        
|Financing Activities                                 |                                                                                      |                                                        |                                                     |                                                                    |        |         |        
|                                                     | Change in short-term debt                                                            |                                                        |                                                     | (2,971                                                             | )      |         | (8,349 
|                                                     | Issuance of long-term debt                                                           |                                                        |                                                     |                                                                   |        |         |       
|                                                     | Redemption of long-term debt                                                         |                                                        |                                                     |                                                                   |        |         |       
|                                                     | Dividends on common stock                                                            |                                                        |                                                     | (11,707                                                            | )      |         | (9,657 
|                                                     |                                                                                      |                                                        |                                                     |                                                                    |        |         |        
|                                                     |                                                                                      |                                                        | Net cash provided by (used in) financing activities |                                                                    |        | (14,678 | )      
|Investing Activities                                 |                                                                                      |                                                        |                                                     |                                                                    |        |         |        
|                                                     | Construction expenditures (less allowance for equity funds used during construction) |                                                        |                                                     | (34,196                                                            | )      |         | (28,433
|                                                     |                                                                                      |                                                        |                                                     |                                                                    |        |         |        
|                                                     |                                                                                      |                                                        | Net cash provided by (used in) investing activities |                                                                    |        | (34,196 | )      
|Net increase (decrease) in cash and cash equivalents |                                                                                      |                                                        | (2,361                                              | )                                                                  |        | 2,819   |        
|Cash and cash equivalents at beginning of period     |                                                                                      |                                                        | 6,460                                               |                                                                    |        | 3,641   |        
|                                                     |                                                                                      |                                                        |                                                     |                                                                    |        |         |        
|Cash and cash equivalents at end of period           |                                                                                      | $                                                      | 4,099                                               |                                                                    | $      | 6,460   |        
|                                                     |                                                                                      |                                                        |                                                     |                                                                    |        |         |        
|Supplemental Disclosure of Cash Flow Information     |                                                                                      |                                                        |                                                     |                                                                    |        |         |        
|                                                     | Cash paid during the year for:                                                       |                                                        |                                                     |                                                                    |        |         |        
|                                                     |                                                                                      | Interest (net of amount capitalized)                   |                                                     | $                                                                  | 6,775  |         | $      
|                                                     |                                                                                      | Income taxes                                           |                                                     | $                                                                  | 10,848 |         | $      

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements.

94

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THE UNION LIGHT, HEAT AND POWER COMPANY  STATEMENTS OF CAPITALIZATION

|                                         |                                                                                                                                          | December 31                              |                           
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | --------------------------
|
|
|Long-term Debt(excludes current portion) |                                                                                                                                          |                                          |                           
|                                         | Other Long-term Debt:                                                                                                                    |                                          |                           
|                                         |                                                                                                                                          | 6.11% Debentures due December 8, 2003    |                           
|                                         |                                                                                                                                          | 6.50% Debentures due April 30, 2008      |                           
|                                         |                                                                                                                                          | 7.65% Debentures due July 15, 2025       |                           
|                                         |                                                                                                                                          | 7.875% Debentures due September 15, 2009 |                           
|                                         |                                                                                                                                          |                                          |                           
|                                         |                                                                                                                                          |                                          | Total Other Long-term Debt
|                                         |                                                                                                                                          | Unamortized Premium and Discount  Net   |                           
|                                         |                                                                                                                                          |                                          |                           
|                                         |                                                                                                                                          |                                          | Total Long-term Debt      
|Common Stock Equity                      |                                                                                                                                          |                                          |                           
|                                         | Common Stock  $15.00 par value; authorized shares  1,000,000; outstanding shares  585,333 at December 31, 2001, and December 31, 2000 |                                          | $                         
|                                         | Paid-in capital                                                                                                                          |                                          |                           
|                                         | Retained earnings                                                                                                                        |                                          |                           
|                                         | Accumulated other comprehensive income (loss)                                                                                            |                                          |                           
|                                         |                                                                                                                                          |                                          |                           
|                                         |                                                                                                                                          |                                          | Total Common Stock Equity 
|                                         |                                                                                                                                          |                                          |                           
|                                         |                                                                                                                                          |                                          |                           

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements.

95

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NOTES TO FINANCIAL STATEMENTS

In this reportCinergy(which includesCinergy Corp.and all of
our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as "we", "our", or "us".

1.    Summary of Significant Accounting Policies

(a)Nature of Operations

Cinergy Corp., a Delaware corporation created in October 1994, owns all outstanding common stock of The
Cincinnati Gas & Electric Company (CG&E) and PSI Energy, Inc. (PSI), both of which are
public utility subsidiaries. As a result of this ownership, we are considered a utility holding company. Because we are a holding company with material utility subsidiaries operating in multiple
states, we are registered with and are subject to regulation by the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935, as amended (PUHCA). Our other
principal subsidiaries are:



CG&E, an Ohio corporation, is a combination electric and gas public utility company that provides service in the southwestern portion of
Ohio and, through its subsidiaries, in nearby areas of Kentucky and Indiana.CG&E'sprincipal subsidiary, The Union Light, Heat and Power Company
(ULH&P), is a Kentucky corporation that provides electric and gas service in northern Kentucky.CG&E'sother subsidiaries are insignificant to its results of operations.

In
2001,CG&Ebegan a transition to electric deregulation and customer choice. Currently, the competitive retail electric market in Ohio
is in the development stage.CG&Eis recovering its Public Utilities Commission of Ohio (PUCO) approved costs and retail electric rates are frozen
during this market development period. See Note 18 for a discussion of key elements on Ohio deregulation.

PSI, an Indiana corporation, is a vertically integrated and regulated electric utility that provides service in north central, central,
and southern Indiana.

The
following table presents further information related to the operations of our domestic utility companies (our operating companies):

Principal Line(s) of BusinessCG&Eand subsidiaries

  Generation, transmission, distribution, and sale of electricity
  Sale and/or transportation of natural gasPSI

  Generation, transmission, distribution, and sale of electricityULH&P

  Transmission, distribution, and sale of electricity
  Sale and transportation of natural gas


Wholesale
Energy is a holding company forCinergy'senergy commodity businesses, including electric production, as the generation assets
eventually become unbundled from the utility subsidiaries. See Note 18 for a discussion on Ohio deregulation. Cinergy Power Generation Services, LLC (Generation Services), a wholly-owned
subsidiary of Wholesale Energy, provides electric production-

96

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related construction, operation and maintenance services to certain affiliates and non-affiliated third parties.

Services
is a service company that provides our subsidiaries with a variety of centralized administrative, management, and support services. Investments holds most of our domestic
non-regulated, energy-related businesses and investments. Global Resources holds most of our international businesses and investments and directs our renewable energy investing activities
(for example, wind farms). Technologies primarily holds our portfolio of technology-related investments.

We
conduct operations through our subsidiaries and manage through the following three business units:



For
further discussion of business units see Note 16.

(b)Presentation

Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles (GAAP). Actual results could differ,
as these estimates and assumptions involve judgment. These estimates and assumptions affect various matters, including:



Additionally,
we have reclassified certain prior-year amounts in the financial statements ofCinergy, CG&E,PSI, andULH&Pto conform to current presentation.

We
use three different methods to report investments in subsidiaries or other companies: the consolidation method, the equity method, and the cost method.



We use the consolidation method when we own a majority of the voting stock of or have the ability to control a subsidiary. We eliminate all significant
intercompany transactions when we consolidate these accounts. Our consolidated financial statements include the accounts ofCinergy, CG&E, andPSI, and their wholly-owned subsidiaries.



We use the equity method to report investments, joint ventures, partnerships, subsidiaries, and affiliated companies in which we do not have control, but have the
ability to exercise influence over operating and financial policies (generally, 20% to 50% ownership). Under the equity method we report:



97

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We use the cost method to report investments, joint ventures, partnerships, subsidiaries, and affiliated companies in which we do not have control and are unable
to exercise significant influence over operating and financial policies (generally, up to 20% ownership). Under the cost method we report our investments in the entity asOther
investmentsin our Consolidated Balance Sheets.

(c)Regulation

Our operating companies and certain of our non-utility subsidiaries must comply with the rules prescribed by the SEC under the PUHCA. Our operating
companies must also comply with the rules prescribed by the Federal Energy Regulatory Commission (FERC) and the state utility commissions of Ohio, Indiana, and Kentucky.

Our
operating companies use the same accounting policies and practices for financial reporting purposes as non-regulated companies under GAAP. However, sometimes actions by
the FERC and the state utility commissions result in accounting treatment different from that used by non-regulated companies. When this occurs, we apply the provisions of Statement of
Financial Accounting Standards No. 71,Accounting for the Effects of Certain Types of Regulation(Statement 71). In accordance with Statement 71,
we record regulatory assets and liabilities (expenses deferred for future recovery from customers or obligations to be refunded to customers) on our Balance Sheets.

Comprehensive
electric deregulation legislation was passed in Ohio on July 6, 1999. As required by the legislation,CG&Efiled its
Proposed Transition Plan for approval by the PUCO on December 28, 1999. On August 31, 2000, the PUCO approved a stipulation agreement relating to CG&E'stransition plan. This plan created
a Regulatory Transition Charge (RTC), designed to recover CG&E'sgeneration-related regulatory assets and transition costs over a ten-year period which began January 1, 2001. Accordingly,
Statement 71 was discontinued for the generation portion ofCG&E'sbusiness and Statement of Financial Accounting Standards No. 101, Regulated EnterprisesAccounting
for the Discontinuation of Application of FASB Statement No. 71was applied. The effect of this
change to the financial statements was immaterial. Except with respect to the generation-related assets and liabilities ofCG&E, as of
December 31, 2001,PSI,CG&E, andULH&Pcontinue
to meet the criteria of Statement 71. However, as other states implement deregulation legislation, the application of Statement 71 will need to be reviewed. Based on our operating companies' current
regulatory orders and the regulatory environment in which they currently operate, the recovery of regulatory assets recognized in the accompanying Balance Sheets as of December 31, 2001, is
probable. The effect of future discontinuance of Statement 71 on results of operations, cash flows, or statements of position cannot be determined until deregulation legislation plans have been
approved by each state in which we do business. For a further discussion of Ohio deregulation see Note 18.

98

---

Our
regulatory assets and amounts authorized for recovery through regulatory orders at December 31, 2001, and 2000, are as follows:

|                                                               |                            | 2001 |     | 2000
|-------------------------------------------------------------- | -------------------------- | ---- | --- | ----
|
|
|Amounts due from customers  income taxes(2)                   |                            | $    | 57  |     
|Gasification services agreement buyout costs(3)                |                            |      |    |     
|Post-in-service carrying costs and deferred operating expenses |                            |      |    |     
|Coal contract buyout cost(4)                                   |                            |      |    |     
|Deferred demand-side management costs                          |                            |      |    |     
|Deferred merger costs                                          |                            |      | 6   |     
|Unamortized costs of reacquiring debt                          |                            |      | 10  |     
|Coal gasification services expenses                            |                            |      |    |     
|RTC recoverable assets(5)                                      |                            |      | 511 |     
|Other                                                          |                            |      | 9   |     
|                                                               |                            |      |     |     
|                                                               | Total regulatory assets    |      | $   | 593 
|                                                               | Authorized for recovery(6) |      | $   | 573 

---

---

(d)Statements of Cash Flows

We defineCash equivalentsas investments with maturities of three months or less when acquired.

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---

(e)Operating Revenues and Fuel Costs

Our operating companies recordOperating revenuesfor electric and gas service, including unbilled revenues and
the associated expenses, when they provide the service to the customers. The associated expenses include:



These
expenses are shown in our Statements of Income ofCinergy,CG&E, and PSIasFuel
and purchased and exchanged powerandGas
purchased. These expenses are shown inULH&P'sStatements of Income asElectricity purchased from parent
for resaleandGas purchased. Any portion of these costs that are recoverable or refundable to customers in future periods is
deferred in eitherAccounts receivableorAccounts payablein our Balance Sheets.

Indiana
law limits the amount of fuel costs thatPSIcan recover to an amount that will not result in earning a return in excess of that
allowed by the IURC. Due to deregulation in the state of Ohio, the recovery of fuel costs in retail rates has been frozen.

(f)Property, Plant, and Equipment

Property, plant, and equipmentincludes the utility and non-regulated business property and equipment
that is in use, being held for future use, or under construction. We report ourProperty, plant, and equipmentat its original cost, which includes:



In
August 2000, the generation assets ofCG&Ewere released from the first mortgage indenture lien. CG&E'stransmission assets, distribution
assets, and any generating assets added after August 2000, remain subject to the lien of the first
mortgage bond indenture. The utility property ofPSIis also subject to the lien of its first mortgage bond indenture.

(g)Depreciation

We determine the provisions for depreciation expense using the straight-line method. The depreciation rates are based on periodic studies of the
estimated useful lives (the number of years we expect to be able to use the properties) and the net cost to remove the properties. The average

100

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depreciation rates forProperty, plant, and equipment, excluding software, are presented in the table below.

|                     |                                   | 2001 |     | 2000 |     | 1999 |    
|-------------------- | --------------------------------- | ---- | --- | ---- | --- | ---- | ---
|Cinergy              |                                   |      |     |      |     |      |    
|                     | Non-regulated(1)                  |      | 4.2 | %    |    | %    |   
|CG&Eand subsidiaries |                                   |      |     |      |     |      |    
|                     | Electric                          |      | 2.5 |      | 2.6 |      | 2.9
|                     | Gas                               |      | 2.9 |      | 2.9 |      | 2.9
|                     | Common                            |      | 2.9 |      | 3.3 |      | 2.7
|                     | Non-regulated electric generation |      | 3.2 |      | 3.1 |      |   
|PSI                  |                                   | 3.0  |     | 3.0  |     | 3.0  |    
|ULH&P                |                                   |      |     |      |     |      |    
|                     | Electric                          |      | 3.2 |      | 3.3 |      | 3.3
|                     | Gas                               |      | 3.2 |      | 3.1 |      | 3.1
|                     | Common                            |      | 5.0 |      | 5.1 |      | 5.2

---

---

(h)Allowance for Funds Used During Construction (AFUDC)

Our operating companies finance construction projects with borrowed funds and equity funds. Regulatory authorities allow us to record the costs of these funds as
part of the cost of construction projects. AFUDC is calculated using a methodology authorized by the regulatory authorities. AFUDC rates are compounded semi-annually and are as follows:

2001

2000

1999Cinergyaverage

7.4
%
8.0
%
7.3
%CG&Eand subsidiaries average

8.6

8.4

8.0PSIaverage

7.1

7.4

6.5ULH&Paverage

5.7

6.6

5.3


The
borrowed funds component of AFUDC, which is recorded on a pre-tax basis, was as follows:

2001

2000

1999(in millions)Cinergy

$
8.4

$
8.2

$
5.6CG&Eand subsidiaries


1.0


5.0


3.4PSI


7.4


3.2


2.2ULH&P


0.2


0.4


0.2


With
the deregulation ofCG&E'sgeneration assets, the AFUDC method is no longer used to capitalize the cost of funds used during
generation-related construction atCG&E. See (i) below for a discussion of capitalized interest.

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(i)Capitalized Interest

Cinergycapitalizes interest costs for non-regulated construction projects in accordance with
Statement of Financial Accounting Standards No. 34,Capitalization of Interest Cost(Statement 34). The primary differences from AFUDC are that
Statement 34 methodology does not include a component for equity funds and does not emphasize short-term borrowings over long-term borrowings. Capitalized interest costs, which
are recorded on a pre-tax basis, were $7.1 million and $5.5 million forCinergyand CG&E, respectively, for the year ended December 31,
2001. Capitalized interest costs for the years 1999 and 2000 were immaterial.

(j)Federal and State Income Taxes

Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes, requires an asset and
liability approach for financial accounting and reporting of income taxes. The tax effects of differences between the financial reporting and tax basis of accounting are reported as Deferred income tax assetsorliabilitiesin our Balance Sheets and are based on currently enacted
income tax rates.

Investment
tax credits, which have been used to reduce our federal income taxes payable, have been deferred for financial reporting purposes. These deferred investment tax credits are
being amortized over the useful lives of the property to which they are related. For a further discussion of income taxes see Note 12.

(k)Energy Marketing and Trading

We market and trade electricity, natural gas, and other energy-related products. We designate transactions as physical or trading at the time they are originated.
Physical refers to our intent and projected ability to fulfill substantially all obligations from company-owned assets. We sell generation to third parties when it is not required to meet native load
requirements (end-use customers within our public utility companies' franchise service territory). All other energy contracts (including most natural gas contracts) are classified as
trading. We account for physical transactions on a settlement basis and trading transactions using the mark-to-market method of accounting, consistent with our application of
Emerging Issues Task Force (EITF) 98-10,Accounting for Contracts Involved in Energy Trading and Risk Management Activities. To the extent
that physical transactions constitute derivatives under Statement of
Financial Accounting Standards No. 133,Accounting for Derivatives and Hedging Activities, (Statement 133), we typically utilize the normal
purchases and sales exemption when the criteria for the application of the normal exemption are met, the most critical criterion being probability of delivery under the contract. Should we determine
that delivery under a previously exempted contract is no longer probable, that contract would be recognized at fair value and subsequently marked to market. To the extent trading transactions
constitute derivatives under Statement 133, we typically do not attempt to identify them as a hedging instrument.

Under
the mark-to-market method of accounting, trading transactions are shown at fair value in our Balance Sheets asEnergy risk
management assetsandEnergy risk management liabilities. We reflect changes in fair value resulting in unrealized gains and
losses inFuel and purchased and exchanged powerandGas purchasedon our Statements of Income. We
record the revenues and costs for all transactions in our Statements of Income when the contracts are settled. We recognize revenues inOperating
revenues; costs are recorded inFuel and purchased and exchanged powerandGas
purchased.

Although
we intend to settle physical electricity contracts with company-owned generation, occasionally we settle these contracts with power purchased on the open trading markets. The
cost of these purchases could be in excess of the associated revenues. We recognize the gains or losses on these transactions as the power is delivered. Due to the infrequency of such settlements,
both historical and projected, and the fact that physical power settlement to the customer still occurs, we continue to

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apply the normal purchases and sales exemption to such physical contracts that constitute derivatives. Open market purchases may occur for the following reasons:



We
value contracts in the trading portfolio using end-of-the-period market prices, utilizing the following factors (as applicable):



We
anticipate that some of the electricity obligations, even though considered trading contracts, will ultimately be settled using company-owned generation. The cost of this generation
is usually below the market price at which the trading portfolio has been valued. The potential for earnings volatility from period to period is increased due to the risks associated with marketing
and trading electricity, natural gas, and other energy-related products.

Throughout
2001, our natural gas trading volumes increased substantially. Because of this volume change and the potential volatility of gas prices, our risk exposure to these markets has
increased. However, we continue to employ value-at-risk analysis and other methodologies to mitigate our risks in all trading operations, including natural gas trading.

We
are in the process of evaluating the feasibility of coal marketing as a commercial activity. While our review of establishing a dedicated commercial activity is ongoing, we executed a
small number of sales contracts in the fourth quarter of 2001. These contracts were entered into primarily to balance forecasted supply and demand in 2002 as we had some coal under option, accounted
for at fair value, that our forecast indicated would not be internally consumed. Since option contracts cannot utilize the normal exemption (see Note 1(m)(iii) for certain exceptions to
this rule), the coal from this option was designated to source these sales contracts. We have concluded that these sales contracts meet the definition of a derivative and are therefore accounted for
at fair value. Should coal begin to be marketed in 2002 under a formal commercial activity, it is likely that the volume of coal transactions accounted for under mark-to-market
could increase substantially. Since we are still evaluating the viability of this as a commercial activity, the impact to either our financial position or results of operations cannot be determined at
this time.

(l)Financial Derivatives

We use derivative financial instruments to manage:



We
account for derivatives under Statement 133, which requires all derivatives that are not exempted to be accounted for at fair value. Changes in the derivative's fair value must be
recognized currently in earnings unless specific hedge accounting criteria are met. Gains and losses on derivatives

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that qualify as hedges can (a) offset related fair value changes on the hedged item in the income statement for fair value hedges; or (b) be recorded in other comprehensive income for
cash flow hedges. To qualify for hedge accounting, financial instruments must be designated as a hedge (for example, an offset of foreign exchange or interest rate risks) at the inception of the
contract and must be effective at reducing the risk associated with the hedged item. Accordingly, changes in the fair values or cash flows of instruments designated as hedges must be highly correlated
with changes in the fair values or cash flows of the related hedged items.

From
time to time, we may use foreign currency contracts (for example, a contract obligating one party to buy, and the other to sell, a specified quantity of a foreign currency for a
fixed price at a future date) and currency swaps (for example, a contract whereby two parties exchange principal and interest cash flows denominated in different currencies) to hedge foreign currency
denominated purchase and sale commitments (cash flow hedges) and certain of our net investments in foreign operations (net investment hedges) against currency exchange rate fluctuations.
Reclassification of unrealized gains or losses on foreign currency cash flow hedges from other comprehensive income occurs when the underlying hedged item is recorded in income.

We
also use interest rate swaps (an agreement by two parties to exchange fixed-interest rate cash flows for floating-interest rate cash flows). Through December 31, 2000, we
utilized the accrual method to account for these interest rate swaps. Accordingly, gains and losses were calculated based on the current period difference between the fixed-rate and the
floating-rate interest amounts, using agreed upon notional amounts. These gains and losses were recognized in our Statements of Income as a component of Interestover the life of the agreement.
Effective with our adoption of Statement 133 in the first quarter of 2001, we began accounting for interest
rate swaps using fair value accounting and are assessing the effectiveness of any swaps used in hedging activities. At December 31, 2001, the fair value, and ineffectiveness, of instruments
that we have classified as fair value or cash flow hedges of debt instruments was not material. Reclassification of unrealized gains or losses on cash flow hedges of variable-rate debt
instruments from other comprehensive income occurs as interest payments are accrued on the debt instrument. See Note 1(m)(iii) below for further discussion of Statement 133.

(m)Accounting Changes

(i)  Business Combinations and Intangible Assets

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business
Combinations(Statement 141), and No. 142,Goodwill and Other Intangible Assets(Statement 142). Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and
other intangibles with indefinite lives will no longer be subject to amortization. Goodwill will be initially assessed for impairment shortly after adoption and at least annually thereafter by
applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under current accounting standards. This test must be applied at the "reporting unit" level, which
is not permitted to be broader than the current business segments discussed in Note 16. Under Statement 142, an acquired intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do
so. We began applying Statement 141 in the third quarter of 2001 and we will adopt Statement 142 in the first quarter of 2002. The discontinuance of amortization of goodwill beginning in the first
quarter of 2002 will not be material to our results of operations. We have identified the reporting units forCinergyand are in the process of
performing the initial impairment test. Preliminary estimates indicate that the effects of this test will not be material to our results of operations.

104

---



In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement
Obligations(Statement 143). Statement 143 requires fair value recognition of legal obligations to retire long-lived assets at the time such obligations are
incurred. The initial recognition of this liability will be accompanied by a corresponding increase in property, plant, and equipment. Subsequent to the initial recognition, the liability will be
adjusted for any revisions to the expected cash flows of the retirement obligation (with corresponding adjustments to property, plant, and equipment), and for accretion of the liability due to the
passage of time (recognized as an operation expense). Additional depreciation expense will be recorded prospectively for any property, plant, and equipment increases. We currently accrue costs of
removal on many regulated, long-lived assets through depreciation expense, with a corresponding charge to accumulated depreciation, as allowed by each regulatory jurisdiction. For assets
that we conclude have a retirement obligation under Statement 143, the accounting we currently use will be modified to comply with this standard. We will adopt Statement 143 in the first quarter of
2003. We are beginning to analyze the impact of this statement, but, at this time, we are unable to predict whether the implementation of this accounting standard will be material to our financial
position or results of operations.

(iii)  Derivatives

During 1998, the FASB issued Statement 133. This standard was effective forCinergybeginning in 2001, and
requires us to record derivative instruments which are not exempt under certain provisions of Statement 133 as assets or liabilities, measured at fair value (i.e.,
mark-to-market). Our financial statements reflect the adoption of Statement 133 in the first quarter of 2001. Since many of our derivatives were previously required to use
mark-to-market accounting, the effects of implementation were not material.

Our
adoption did not reflect the potential impact of applying mark-to-market accounting to selected electricity options and capacity contracts. We had not
historically marked these instruments to market because they are intended as either hedges of peak period exposure or sales contracts served with physical generation, neither of which were considered
trading activities. At adoption, we classified these contracts as normal purchases or sales based on our interpretation of Statement 133 and in the absence of definitive guidance on such contracts. In
June 2001, the FASB staff issued guidance on the application of the normal purchases and sales exemption to electricity contracts containing characteristics of options. While much of the
criteria this guidance requires is consistent with the existing guidance in Statement 133, some criteria were added. We adopted the new guidance in the third quarter of 2001, and the effects of
implementation for these contracts were not material. We will continue to apply this guidance to any new electricity contracts that meet the definition of a derivative.

In
October 2001, the FASB staff posted revised guidance on the normal purchases and sales exemption for these contracts. This revised guidance proposed changes in certain
quantitative criteria that were critical to determining whether or not a contract with option characteristics qualified for the normal exemption. In December 2001, the FASB staff again revised
this guidance to make the changes proposed by the October guidance more qualitative than quantitative. This new guidance uses several factors to distinguish between capacity contracts, which qualify
for the normal purchases and sales exemption, and options, which do not. These factors include deal tenor, pricing structure, specification of the source of power, and various other factors. Based on
a review of existing contracts, we do not believe this revised guidance, which will be effective in the third quarter of 2002, will have a material impact on our financial position or results of
operations upon adoption. However, given our activity in energy trading, it could increase volatility in future results.

In
October 2001, the FASB staff released final guidance on the applicability of the normal purchases and sales exemption to contracts that contain a minimum quantity (a forward
component) and flexibility to take additional quantity (an option component). While this guidance was issued

105

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primarily to address optionality in fuel supply contracts, it is applicable to all derivatives (subject to certain exceptions for capacity contracts in electricity discussed in the previous
paragraphs). This guidance concludes that such contracts are not eligible for the normal purchases and sales exemption due to the existence of optionality in the contract. Cinergyhas certain contracts
that contain optionality, primarily coal contracts, for which the accounting may be impacted by this new guidance.
We will adopt this guidance in the second quarter of 2002, consistent with the transition provisions. We have begun analyzing contracts to determine the applicability of this guidance and to determine
the interaction between this guidance and Statement 71. Due to a lack of liquidity with respect to coal purchased under certain contracts, some of our contracts may fail to meet the net settlement
criteria of Statement 133, which would preclude such contracts from being considered derivatives. For other possibly affected contracts, we are evaluating the potential for contract restructuring
prior to the adoption of this new guidance. To the extent this restructuring results in separate forwards and options, we would plan to apply the normal exemption to the forwards. The options would
either be accounted for as cash flow hedges, to the extent all criteria were met, or marked to market similar to all other energy trading contracts. Given these evaluations are ongoing, we are unable
to predict whether the implementation of this accounting standard will be material to our results of operations or financial position.

(iv)  Asset Impairment

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144,Accounting for the Impairment of
Long-Lived Assets(Statement 144). Statement 144 addresses accounting and reporting for the impairment or disposal of long-lived assets. It supersedes
previous guidance on (a) accounting for the impairment or disposal of long-lived assets and (b) accounting and reporting for the disposal of a segment of a business (commonly
known as discontinued operations). While Statement 144 incorporates many of the impairment tests and criteria from previous guidance, it does include additional guidance and resolution of
inconsistencies and overlaps with other pronouncements. These include adding clarity around when assets are considered held for disposal (which requires an immediate impairment charge if fair value is
less than book value) and requiring the use of one accounting model for long-lived assets to be disposed of. We will begin applying Statement 144 in the first quarter of 2002. The impact
of implementation on our results of operations and financial position is expected to be immaterial.

(n)Translation of Foreign Currency

We translate the assets and liabilities of foreign subsidiaries, whose functional currency (generally, the local currency of the country in which the subsidiary
is located) is not the United States (U.S.) dollar, using the appropriate exchange rate as of the end of the year. We translate income and expense items using the average exchange rate prevailing
during the month the respective transaction occurs. We record translation gains and losses inAccumulated other comprehensive income (loss), which is a
component of common stock equity.

(o)Related Party Transactions

Cinergyand its subsidiaries engage in related party transactions. These transactions are generally performed at
cost and in accordance with the SEC regulations under the PUHCA. The Balance Sheets of our operating companies reflect amounts payable to and/or receivable from related parties as Accounts payable to affiliated
companiesandAccounts receivable from affiliated companies. The
significant related party transactions are disclosed below.

106

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Services provides our regulated and non-regulated subsidiaries with a variety of centralized administrative, management, and support services in accordance with agreements
approved by the SEC under the PUHCA. The cost of these services are charged to our operating companies on a direct basis or, for general costs which cannot be directly attributed, based on
predetermined allocation factors, including the following ratios:



These
costs were as follows for the years ended December 31:

2001

2000

1999(in millions)Cinergy(1)

$
483

$
479

$
416CG&E and subsidiaries


240


250


208PSI


196


187


168ULH&P


24


25


23


---

Generation
Services, which began operations on January 1, 2001, supplies electric production-related construction, operation and maintenance services to certain of our
subsidiaries pursuant to agreements approved by the SEC under the PUHCA.

The
cost of these services were as follows for the year ended December 31, 2001:

2001(in millions)Cinergy(1)

$
92CG&E


67PSI


21


---

ULH&Ppurchases energy fromCG&Epursuant to a new contract effective January 1,
2002, which was approved by the FERC and the Kentucky Public Service Commission (KPSC). This five-year agreement is a negotiated fixed-rate contract with CG&Eand replaces the previous
cost-of-service based contract, which expired on December 31, 2001.

ULH&Ppurchased energy fromCG&Efor resale in the amounts of $152 million,
$160 million, and $159 million for the years ended 2001, 2000, and 1999, respectively.

Cinergy Corp.and our operating companies participate in a money pool arrangement by which those companies with surplus cash provide
short-term loans to others. For a further discussion on the money pool agreement see Note 6.

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2.    Common Stock

(a)Changes In Common Stock Outstanding

The following table reflects information related to shares of common stock issued for stock-based plans.

|                                                                   |  | Newly Issued Shares Used to
Grant or Settle Awards
|------------------------------------------------------------------ |  | --------------------------------------------------
|
|Cinergy Corp. 1996 Long-term Incentive Compensation Plan (LTIP)    |  | 64,851                                            
|Cinergy Corp. Stock Option Plan (SOP)                              |  | 197,957                                           
|Cinergy Corp. Employee Stock Purchase and Savings Plan             |  | 1,504                                             
|Cinergy Corp. UK Sharesave Scheme                                  |  | 121                                               
|Cinergy Corp. Retirement Plan for Directors                        |  |                                                  
|Cinergy Corp. Directors' Equity Compensation Plan                  |  |                                                  
|Cinergy Corp. Directors' Deferred Compensation Plan                |  |                                                  
|Cinergy Corp. 401(k) Plans                                         |  | 69,500                                            
|Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan |  | 173,984                                           
|Cinergy Corp. Performance Shares Plan                              |  |                                                  
|Cinergy Corp. Union Employees' Savings Incentive Plan              |  |                                                  

We
retired 72,739 shares of common stock in 2001; 32,988 shares in 2000; and 31,777 shares in 1999, mainly representing shares tendered as payment for the exercise of previously granted
stock options.

In
April of 2001,Cinergyadopted the Direct Stock Purchase and Dividend Reinvestment Plan, a plan designed to provide investors with a
convenient method to purchase shares ofCinergy Corp.common stock and to reinvest cash dividends in the purchase of additional shares. This plan
replaced the Dividend Reinvestment and Stock Purchase Plan.

In
November 2001,Cinergychose to reinstitute the practice of issuing newCinergy
Corp.common shares to satisfy obligations under its various employee stock plans and theCinergy Corp.Direct Stock Purchase
and Dividend Reinvestment Plan. This replaces our previous practice of purchasing shares in the open market to fulfill certain plan obligations.

In
January 2002,Cinergyregistered 100,000 shares of common stock under theCinergy
Corp.401(k) Excess Plan.

Cinergy Corp.owns all of the common stock ofCG&Eand PSI. All ofULH&P'scommon stock is held byCG&E.

(b)Dividend Restrictions

Cinergy Corp.'sability to pay dividends to holders of its common stock is principally dependent on the ability of CG&EandPSIto payCinergy Corp.common dividends.Cinergy Corp.,CG&E, andPSIcannot pay dividends on
their common stock if preferred stock dividends or preferred trust dividends are in arrears. The amount of common stock dividends that each company can pay is also limited by certain capitalization
and earnings requirements underCG&E'sandPSI'scredit instruments. Currently, these requirements do
not impact the ability of either company to pay dividends on its common stock.

(c)Stock-based Compensation Plans

We currently have the following stock-based compensation plans:



108

---



The
LTIP, the SOP, and the Employee Stock Purchase and Savings Plan are discussed below. The activity in 2001, 2000, and 1999 for the remaining stock-based compensation plans was not
significant.

We
account for our stock-based compensation plans under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to
Employees. In 2001, 2000, and 1999, we recognized compensation cost related to stock-based compensation plans, before income taxes, of $12.5 million,
$12.8 million, and $(7) million, respectively, in the Statements of Income. The $7 million reduction in 1999 was a result of our revised estimates for the performance-based shares
accrued under the LTIP plan for Performance Cycle (Cycle) I. These amounts primarily reflect compensation cost related to the LTIP performance-based shares. For further discussion see
section (i) below.

Net
income, assuming compensation cost for these plans had been determined at fair value, consistent with the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation(Statement 123), would have been decreased by $4.4 million for 2001, $4.0 million for 2000, and
$2.6 million for 1999. Earnings per common share (EPS) would have been decreased by $.03 for both basic EPS and earnings per common share assuming dilution (EPSassuming dilution)
for 2001, $.03 for both basic and EPSassuming dilution for 2000, and $.02 for both basic and EPSassuming dilution for 1999.

In
estimating the pro forma amounts, the fair value method of accounting was not applied to options granted prior to January 1, 1995. This is in accordance with the provisions of
Statement 123. As a result, the pro forma effect on net income and EPS may not be representative of future years. In addition, the pro forma amounts reflect certain assumptions used in estimating fair
values. These fair value assumptions are described, as applicable, below.

(i) LTIP

The
LTIP was originally adopted in 1996. Under this plan, certain key employees may be granted stock options and the opportunity to earn performance-based shares. Stock options are
granted to participants with an option price equal to the fair market value on the grant date and a vesting period of either three or five years. The vesting period begins on the grant date and all
options expire ten years from that date. The number of shares of common stock issuable under the LTIP is limited to a total of 7,000,000 shares.

Entitlement
to performance-based shares is based onCinergy'sTotal Shareholder Return (TSR) over designated Cycles as measured against a
peer group. Target grants of performance-based shares were made for the following Cycles:

Cycle

Grant
Date

Performance
Period

Target
Grant of Shares(in thousands)IV

1/2000

2000-2002

359V

1/2001

2001-2003

315VI

1/2002

2002-2004

342


109

---

Participants
may earn additional performance shares ifCinergy'sTSR exceeds that of the peer group. For the 2000-2001
performance period (Cycle III), 372,149 shares were earned, based on a TSR of 140%.

(ii)    SOP

The
SOP is designed to align executive compensation with shareholder interests. Under the SOP, incentive and non-qualified stock options, stock appreciation rights (SARs),
and SARs in tandem with stock options may be granted to key employees, officers, and outside directors. The activity under this plan has predominantly consisted of the issuance of stock options.
Options are granted with an option price equal to the fair market value of the shares on the grant date. Options generally vest over five years at a rate of 20% per year, beginning on the grant date,
and expire ten years from the grant date. The total number of shares of common stock issuable under the SOP may not exceed 5,000,000 shares. No stock options may be granted under the plan after
October 24, 2004.

(iii)    Employee Stock Purchase and Savings Plan

The
Employee Stock Purchase and Savings Plan allows essentially all full-time, regular employees to purchase shares of common stock pursuant to a stock option feature. Under
the Employee Stock Purchase and Savings Plan, after-tax funds are withheld from a participant's compensation during a 26-month offering period and are deposited in an
interest-bearing account. At the end of the offering period, participants may apply amounts deposited in the account, plus interest, toward the purchase of shares of common stock. The purchase price
is equal to 95% of the fair market value of a share of common stock on the first date of the offering period. Any funds not applied toward the purchase of shares are returned to the participant. A
participant may elect to terminate participation in the plan at any time. Participation also will terminate if the participant's employment ceases. Upon termination of participation, all funds,
including interest, are returned to the participant without penalty. The sixth (current) offering period began May 1, 2001, and ends June 30, 2003. The purchase price for all shares
under this offering is $32.78. The fifth offering period ended April 30, 2001, with 227,968 shares purchased and the remaining cash distributed to the respective participants. The total number
of shares of common stock issuable under the Employee Stock Purchase and Savings Plan may not exceed 2,000,000.

110

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Activity
for 2001, 2000, and 1999 for the LTIP, SOP, and Employee Stock Purchase and Savings Plan is summarized as follows:

|                             |                      | LTIP and SOP |           | Employee Stock Purchase and Savings Plan
|---------------------------- | -------------------- | ------------ | --------- | ----------------------------------------
|
|Balance at December 31, 1998 |                      | 3,676,514    |           | $                                       
|                             | Options granted      |              | 2,866,100 |                                         
|                             | Options exercised    |              | (259,865  | )                                       
|                             | Options forfeited    |              | (95,500   | )                                       
|                             |                      |              |           |                                         
|Balance at December 31, 1999 |                      | 6,187,249    |           |                                         
|                             | Options granted      |              | 1,329,800 |                                         
|                             | Options exercised    |              | (123,978  | )                                       
|                             | Options forfeited    |              | (402,200  | )                                       
|                             |                      |              |           |                                         
|Balance at December 31, 2000 |                      | 6,990,871    |           |                                         
|                             | Options granted      |              | 811,700   |                                         
|                             | Options exercised    |              | (275,393  | )                                       
|                             | Options forfeited    |              | (79,400   | )                                       
|                             |                      |              |           |                                         
|Balance at December 31, 2001 |                      | 7,447,778    |           | $                                       
|                             |                      |              |           |                                         
|Options Exercisable(1):      |                      |              |           |                                         
|                             | At December 31, 1999 |              | 1,986,749 |                                         
|                             | At December 31, 2000 |              | 3,195,191 |                                         
|                             | At December 31, 2001 |              | 3,763,558 |                                         

---

The
weighted average fair value of options granted under the combined LTIP and the SOP plans was $5.42 in 2001, $2.75 in 2000, and $2.60 in 1999. The weighted average fair value of
options granted under the Employee Stock Purchase and Savings Plan was $5.85 in 2001, and $3.89 in 1999 (no options were granted in 2000). The fair values of options granted were estimated as of the
grant date using the Black-Scholes option-pricing model and the following assumptions:

|                        |  | LTIP and SOP |      | Employee Stock Purchase
and Savings Plan(1) |     
|----------------------- |  | ------------ | ---- | ------------------------------------------- | ----
|
|Risk-free interest rate |  | 4.78         | %    | 6.57                                        | %   
|Expected dividend yield |  | 5.42         | %    | 7.32                                        | %   
|Expected lives          |  | 5.37         | yrs. | 4.86                                        | yrs.
|Expected volatility     |  | 25.01        | %    | 20.18                                       | %   

---

111

---

Price
ranges, along with certain other information, for options outstanding under the combined LTIP and SOP plan at December 31, 2001, were as follows:

Outstanding

ExercisableExercise
Price Range

Number
of Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life

Number
of Shares

Weighted
Average
Exercise
Price$17.35  $23.81

2,885,473

$23.55

6.64 yrs.

1,674,393

$23.37$23.88  $32.65

2,489,905

$25.67

6.23 yrs.

1,089,165

$25.24$33.50  $38.59

2,072,400

$35.67

6.87 yrs.

1,000,000

$36.19


(d)Director, Officer, and Key Employee Stock Purchase Program

In December 1999,Cinergy Corp.adopted the Director, Officer, and Key Employee Stock Purchase Program (the
Program). The purpose of the Program is to facilitate the purchase and ownership ofCinergy Corp.'scommon stock by its directors, officers, and key
employees, thereby further aligning their interests with those of its shareholders.

In
February 2000,Cinergy Corp.purchased approximately 1.6 million shares of common stock on behalf of the participants at
an average price of $24.82 per share.

Participants
had the option of financing the purchases through a five-year credit facility arranged byCinergy Corp.with a
bank. Each participant is obligated to repay the bank any loan principal, interest, and prepayment fees, and each has assigned his or her dividend rights on the purchased shares to the bank to be
applied to interest payments as due on the loan.

Services,
and in part,Cinergy Corp., have guaranteed repayment to the bank of 100% of each participant's loan obligations and the
associated interest, and each participant has agreed to indemnify the guarantor for any payments made by it under the guaranty on the participant's behalf. A participant's obligations to the bank are
unsecured and no restrictions are placed on the participant's ability to sell, pledge, or otherwise encumber or dispose of his or her purchased shares.

(e)Stock Purchase Contracts

In December 2001,Cinergy Corp.issued approximately $316 million notional amount of combined
securities, a component of which was stock purchase contracts. These contracts obligate the holder to purchase common shares ofCinergy Corp.stock on
or before February 2005. The number of shares to be issued is contingent upon the market price ofCinergy Corp.stock, but subject to
predetermined ceiling and floor prices. See Note 4 for further discussion of these securities.

3.    Change in Preferred Stock of Subsidiaries

In 2000,PSIredeemed 289,250 shares of its $100 par value, 6.875% Series preferred stock for $29 million.
All other preferred stock redemptions from 1999 to 2001 were immaterial forCG&EandPSI. Refer to the
Statements of Capitalization ofCG&EandPSIfor detailed information on preferred stock.

4.    Preferred Trust Securities

In December 2001,Cinergy Corp.issued approximately $316 million notional amount of combined
securities consisting of (a) 6.9% preferred trust securities, due February 2007, and (b) stock purchase contracts obligating the holders to purchase between 9.2 and
10.8 million shares ofCinergy Corp.common stock on or before February 2005. A $50 preferred trust security and stock purchase contract
were sold together as a single security unit (Unit). The proceeds of $306 million, which is net of

112

---

approximately $10 million of issuance costs, were used to pay downCinergy Corp.'sshort-term indebtedness. In February 2005,
the preferred trust securities will be remarketed and the dividend rate reset, no lower than 6.9%, to yield $316 million in the remarketing. The holders will use the proceeds from this
remarketing to fund their obligation to purchase shares ofCinergy Corp.common stock under the stock purchase contract. The holders will pay the market
price for the stock at that time, subject to a ceiling of $34.40 per share and a floor of $29.15 per share. The number of shares to be issued will vary according to the stock price, subject to the
total proceeds equaling $316 million. These securities were issued through a wholly-owned trust ofCinergy Corp. The preferred trust securities
are recorded onCinergy Corp.'sBalance Sheets, net of discount and expense, asCompany obligated, mandatorily redeemable,
preferred trust securities of subsidiary, holding solely debt securities of the company. The fair value of the stock purchase contract was charged to Paid-in capitalwith a
corresponding credit toNon-current
liabilitiesother.

Each
Unit will receive quarterly cash payments of 9.5% per annum of the notional amount, which includes the preferred trust security dividend of 6.9% and payment of 2.6%, which
represents principal and interest on the stock purchase contract. Upon delivery of the shares, these stock purchase contract payments will cease.

113

---

5.    Long-Term Debt

Refer to the Statements of Capitalization for detailed information forCG&E, PSI, andULH&P. In addition,Cinergy Corp.and Global
Resources also have the following total long-term debt (excludingLong-term debt due within one year, which is reflected in Current liabilitiesin the
Balance Sheets):

|                    |                      | December 31                                                                                                                                                                                       |                           
|------------------- | -------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------
|
|
|Cinergy Corp.       |                      |                                                                                                                                                                                                   |                           
|                    | Other Long-term Debt |                                                                                                                                                                                                   |                           
|                    |                      | 6.53% Debentures due December 16, 2008                                                                                                                                                            |                           
|                    |                      | 6.125% Debentures due April 15, 2004                                                                                                                                                              |                           
|                    |                      | 6.25% Debentures due September 1, 2004 (Executed interest rate swaps of $250 million set at London Inter-Bank Offered Rate (LIBOR) plus 2.44%)                                                    |                           
|                    |                      |                                                                                                                                                                                                   |                           
|                    |                      |                                                                                                                                                                                                   | Total Other Long-term Debt
|                    | Unamortized Discount |                                                                                                                                                                                                   |                           
|                    |                      |                                                                                                                                                                                                   |                           
|                    |                      |                                                                                                                                                                                                   | TotalCinergy Corp.       
|                    |                      |                                                                                                                                                                                                   |                           
|Global Resources    |                      |                                                                                                                                                                                                   |                           
|                    | Other Long-term Debt |                                                                                                                                                                                                   |                           
|                    |                      | 6.20% Debentures due November 3, 2008                                                                                                                                                             |                           
|                    |                      | Variable interest rate of LIBOR plus 1.75%, due July 2015                                                                                                                                         |                           
|                    |                      | Variable interest rate of LIBOR plus 2.5%, due July 2015                                                                                                                                          |                           
|                    |                      | Variable interest rates ranging between the 3 month Prague Inter-Bank Offered Rate plus 0.55% to the 3 month Euro Inter-Bank Offered Rate (EURIBOR) plus 4.12%, maturing March 2004 to March 2005 |                           
|                    |                      | Fixed interest rates 6.1% - 7.4% maturing March 2003 to May 2003                                                                                                                                  |                           
|                    |                      | Fixed interest rates ranging between 9.423% and 9.911%, maturing September 2010 to September 2019                                                                                                 |                           
|                    |                      | Fixed interest rate of 11.5%, maturing December 2023 to March 2025                                                                                                                                |                           
|                    |                      | Variable interest rate of EURIBOR plus 1.2%, maturing November 2016                                                                                                                               |                           
|                    |                      |                                                                                                                                                                                                   |                           
|                    |                      |                                                                                                                                                                                                   | Total Other Long-term Debt
|                    | Unamortized Discount |                                                                                                                                                                                                   |                           
|                    |                      |                                                                                                                                                                                                   |                           
|                    |                      |                                                                                                                                                                                                   | TotalGlobal Resources    
|                    |                      |                                                                                                                                                                                                   |                           
|Operating Companies |                      |                                                                                                                                                                                                   |                           
|                    | CG&Eand subsidiaries |                                                                                                                                                                                                   | $                         
|                    | PSI                  |                                                                                                                                                                                                   |                           
|                    |                      |                                                                                                                                                                                                   |                           
|                    |                      |                                                                                                                                                                                                   | TotalOperating Companies 
|                    |                      |                                                                                                                                                                                                   |                           
|TotalCinergy       |                      | $                                                                                                                                                                                                 | 3,596,730                 
|                    |                      |                                                                                                                                                                                                   |                           

In
January 2001,PSIretired $19.8 million principal amount of non-interest bearing Series 1994A
Promissory Note, which had matured. The securities were not replaced by new issues of debt. In June 2001,PSIissued $325 million
principal amount of First Mortgage Bonds Series EEE, 6.65% with a maturity date of June 15, 2006. The net proceeds of the offering were used to repay short-term indebtedness. In
November 2001, the note holders exercised their option to call the $50 millionPSI6% Putable/Callable Notes (Notes) on
December 14, 2001, with the intent to reset the interest rate and

114

---

remarket the Notes. However, in December 2001,PSIexercised its option to purchase, and subsequently retired the Notes.

In
September 2001,Cinergy Corp.issued $500 million principal amount of 6.25% debentures with a maturity date of
September 1, 2004. The net proceeds of the offering were used to repay short-term indebtedness. In October 2001,Cinergy Corp.executed three receive-fixed, pay-floating interest rate swaps with a combined notional amount of $250 million. These swaps are designated as fair value hedges of 50% of Cinergy Corp.'s$500 million debentures issue.

During
2001, Global Resources borrowed funds at variable and fixed rates to fund various projects. These loans are classified asLong-term
debtandLong-term debt due within one yearbased upon scheduled maturities.

The
following table reflects the long-term debt maturities, excluding any redemptions due to the exercise of call or put provisions or capital lease obligations. Callable
means the issuer has the right to buy back a given security from the holder at a specified price before maturity. Putable means the holder has the right to sell a given security back to the issuer at
a specified price before maturity.

Cinergy(1)

CG&E and
subsidiaries

PSI(in millions)2002

$
148

$
100

$
232003


92


20
(2)

582004


814


110


12005


3





12006


334





328Thereafter(3)


2,365


978


945$
3,756

$
1,208

$
1,356


---

Maintenance
and replacement fund provisions contained inPSI'sfirst mortgage bond indenture require: (1) cash payments,
(2) bond retirements, or (3) pledges of unfunded property additions each year based on an amount related toPSI'snet revenues.

6.    Notes Payable and Other Short-term Obligations

Short-term obligations may include:



Short-term Notes

Short-term borrowings mature within one year from the date of issuance. We primarily use unsecured revolving lines of credit for
short-term borrowings. A portion of each company's revolving lines is used to provide credit support for commercial paper (discussed below). When revolving lines are reserved for
commercial paper or backing letters of credit, they are not available for additional borrowings. The fees we paid to secure short-term borrowings were immaterial during each of the periods
1999, 2000, and 2001.

115

---

At December 31, 2001,Cinergy Corp.had $437 million remaining unused and available capacity relating to its
$1.2 billion revolving credit facilities. In February 2001,Cinergy Corp.placed a $400 million, 364-day senior
revolving credit facility and in March 2001,Cinergy Corp.placed a $500 million, 364-day senior revolving credit facility.
These facilities provide short-term financing. Also, in May 2001,Cinergy Corp.placed a $400 million, three-year
senior revolving credit facility. This facility replacedCinergy Corp.'s$400 million, five-year revolving credit facility that
expired in May 2001, and its $200 million, three-year revolving credit facility that expired in July 2001. In December 2001,Cinergy
Corp.permanently reduced the size of its $500 million, 364-day senior revolving credit facility to $225 million.

In
early 2002,Cinergy Corp.placed a $600 million, 364-day senior revolving credit facility. This facility replaces
the $400 million, 364-day senior revolving credit facility that expired in February 2002 and will replace the $225 million, 364-day senior revolving credit
facility expiring in March 2002, and a $150 million, three-year senior revolving credit facility expiring in June 2002.

In
addition to revolving credit facilities,Cinergy Corp.,CG&E, and PSIalso maintain uncommitted lines of
credit. These facilities are not guaranteed sources of capital and represent an informal agreement to lend money,
subject to availability, with pricing to be determined at the time of advance. At December 31, 2001,Cinergy Corp.'s$40 million
uncommitted line andCG&E's$15 million uncommitted line were unused.PSI'suncommitted line of
$60 million was fully drawn at year-end.

Commercial Paper

In early 2001,Cinergy Corp.expanded the commercial paper program to a maximum outstanding principal amount of
$800 million and reduced the established lines of credit atCG&EandPSI. The expansion of the
commercial paper program at theCinergy Corp.level supports, in part, the short-term borrowing needs of CG&EandPSIand eliminates their need for separate commercial paper programs. As of December 31,
2001,Cinergy Corp.had $125 million in commercial paper outstanding.

Variable Rate Pollution Control Notes

CG&EandPSIhave issued variable rate pollution control notes
(tax-exempt notes obtained to finance equipment or land development to control pollution). Because the holders of these notes have the right to redeem their notes on any business day, with
the remainder being redeemable annually, they are
reflected inNotes payable and other short-term obligationsin the Balance Sheets of Cinergy,CG&E, andPSI.

In
August 2001,CG&Eissued $12.1 million of Ohio Air Quality Development Authority Air Quality Development Revenue Bonds
2001, Series A with a final maturity date of August 1, 2033, and an initial interest rate of 3.7%. The interest rate will reset annually on August 1, as negotiated, based on the
Municipal Market Data Index as a benchmark. The net proceeds were used to finance the cost of air quality and solid waste disposal facilities at the William H. Zimmer Generating Station (Zimmer
Station).

116

---

The
following table summarizes ourNotes payable and other short-term obligations, excludingNotes
payable to affiliated companies.

|                           |                         | December 31, 2001 |   | December 31, 2000 |  
|-------------------------- | ----------------------- | ----------------- | - | ----------------- | -
|
|
|Cinergy Corp.              |                         |                   |   |                   |  
|                           | Revolving lines(1)      |                   | $ | 1,175             |  
|                           | Uncommitted lines       |                   |   | 40                |  
|                           | Commercial paper        |                   |   | 800               |  
|Operating companies        |                         |                   |   |                   |  
|                           | Revolving lines         |                   |   |                  |  
|                           | Uncommitted lines       |                   |   | 75                |  
|                           | Pollution control notes |                   |   | N/A               |  
|Non-regulated subsidiaries |                         |                   |   |                   |  
|                           | Revolving lines         |                   |   | 46                |  
|                           | Short-term debt         |                   |   | 49                |  
|                           |                         |                   |   |                   |  
|Cinergy Total              |                         |                   |   |                   | $
|CG&E and subsidiaries      |                         |                   |   |                   |  
|                           | Revolving lines         |                   | $ |                  |  
|                           | Uncommitted lines       |                   |   | 15                |  
|                           | Pollution control notes |                   |   | N/A               |  
|                           |                         |                   |   |                   |  
|CG&E Total                 |                         |                   |   |                   | $
|PSI                        |                         |                   |   |                   |  
|                           | Revolving lines         |                   | $ |                  |  
|                           | Uncommitted lines       |                   |   | 60                |  
|                           | Pollution control notes |                   |   | N/A               |  
|                           |                         |                   |   |                   |  
|PSI Total                  |                         |                   |   |                   | $

---

Money Pool

Cinergy Corp., Services, and our operating companies participate in a money pool arrangement to better manage cash
and working capital requirements. Under this arrangement, those companies with surplus short-term funds provide short-term loans to affiliates (other than Cinergy Corp.) participating under this
arrangement. This surplus cash may be from internal or external sources. The amounts outstanding under this
money pool arrangement are shown asNotes receivable from affiliated companiesorNotes payable to affiliated
companieson the Balance Sheets ofCG&E,PSI, and ULH&P.

7.    Sales of Accounts Receivable

CG&E,PSI, and ULH&Phave an
agreement to sell, on a revolving basis, undivided percentage interests in certain of their accounts receivable and the related
collections up to an aggregate maximum of $350 million.CG&Eretains servicing responsibilities for its role as a collection agent of the amounts
due on the sold receivables. However, the purchaser assumes the risk of collection on the sold

117

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receivables without recourse toCG&E,PSI, andULH&Pin
the event of a loss. Proceeds from a portion of the sold receivables are held back as a reserve to reduce the purchaser's credit risk.CG&E, PSI, andULH&Pdo not retain any ownership interest in the sold receivables, but do retain undivided
interests in their remaining balances of accounts receivable. The recorded amounts of the retained interests are measured at net realizable value.

TheAccounts receivableon the Balance Sheets ofCinergy, CG&E,PSI, andULH&Pare net of the amounts sold at
December 31, 2001, and 2000.

The
following table shows the receivables sold, the associated reserves held back, and the net amounts received as of December 31, 2001, and 2000:

|                     |  | Receivables Sold |     | Reserves |   | Net Amount
|-------------------- |  | ---------------- | --- | -------- | - | ----------
|
|2001                 |  |                  |     |          |   |           
|Cinergy              |  | $                | 322 |          | $ | 65        
|CG&Eand subsidiaries |  |                  | 188 |          |   | 38        
|PSI                  |  |                  | 134 |          |   | 27        
|ULH&P                |  |                  | 27  |          |   | 5         
|2000                 |  |                  |     |          |   |           
|Cinergy              |  | $                | 316 |          | $ | 59        
|CG&Eand subsidiaries |  |                  | 192 |          |   | 36        
|PSI                  |  |                  | 124 |          |   | 23        
|ULH&P                |  |                  | 32  |          |   | 6         

8.    Leases

(a)Operating Leases

We have entered into operating lease agreements for various facilities and properties such as computer, communication and transportation equipment, and office
space. Total rental payments on operating leases for each of the past three years are detailed in the table below. This table also shows future minimum lease payments required for operating leases
with remaining non-cancelable lease terms in excess of one year as of December 31, 2001:

|                     |  | Actual Payments |    | Estimated Minimum Payments
|-------------------- |  | --------------- | -- | --------------------------
|
|
|Cinergy(1)           |  | $               | 50 |                           
|CG&Eand subsidiaries |  |                 | 27 |                           
|PSI                  |  |                 | 21 |                           
|ULH&P(2)             |  |                 | 4  |                           

---

(b)Capital Leases

In 2001, 2000, and 1999,CG&E,PSI, and ULH&Pentered into capital lease agreements to fund the purchase of gas and electric meters. The lease terms are for 120 months commencing
December 2001, 2000, and 1999, with early buyout options at 48, 72, and 105 months. Since the objective is to own the meters indefinitely, the companies plan to exercise the buyout
option at month

118

---

105. The lease rates used to determine the monthly payments were 6.00%, 6.09%, and 6.71% for 2001, 2000, and 1999, respectively. The meters are depreciated at the same rate as if they were owned by
the companies.CG&E,PSI, andULH&Peach recorded a
capital lease obligation, included inNon-current liabilities other.

The
total minimum lease payments and the present values for these capital lease items are shown below:

Total Minimum Lease PaymentsCinergy

CG&Eand
subsidiaries

PSI

ULH&P(in millions)Total minimum lease payments(1)

$
46

$
26

$
20

$
8Less: amount representing interest


(11
)

(6
)

(5
)

(2
)Present value of minimum lease payments

$
35

$
20

$
15

$
6


---

In
2000,CG&Eentered into a capital lease agreement to fund the purchase of equipment for Zimmer Station. In August 2001, CG&Epurchased the
equipment at Zimmer Station, effectively terminating the lease.

In
1996,CG&Eentered into a sale-leaseback agreement for certain equipment at Woodsdale Generating Station. The lease was a
capital lease with an initial lease term of five years expiring on October 31, 2001. At the end of this term,CG&Epurchased the equipment.

9.    Financial Instruments

(a)Financial Derivatives

We have entered into financial derivative contracts for the purposes described below.



Our current policy in managing exposure to fluctuations in interest rates is to maintain the total amount of outstanding debt in floating interest rate debt
instruments of approximately 30%. In maintaining this level of exposure, we use interest rate swaps. Under these swaps, we agree with other parties to exchange, at specified intervals, the difference
between fixed-rate and floating-rate interest amounts calculated on an agreed notional amount.CG&Ehas an outstanding interest
rate swap agreement that decreased the percentage of floating-rate debt. Under the provisions of the swap, which has a notional amount of $100 million, CG&Epays a fixed-rate and receives a
floating-rate through October 2007. This swap qualifies as a cash flow hedge under
the provisions of Statement 133. As the terms of the swap agreement mirror the terms of the debt agreement that it is hedging, we anticipate that this swap will continue to be effective as a hedge.
Changes in fair value of this swap are recorded inAccumulated other comprehensive income (loss), beginning with our adoption of Statement 133 on
January 1, 2001. In October 2001,Cinergy Corp.executed three interest rate swaps with a combined notional amount of $250 million.
Under the provisions of the swaps,Cinergy Corp.will receive fixed-rate interest payments and pay floating-rate interest
payments through September 2004. These swaps qualify as fair value hedges under the provisions of Statement 133. We anticipate that these swaps will continue to be effective as hedges. See
Note 1(l) for additional information on financial derivatives. In the future, we will continually monitor market conditions to evaluate whether to modify our level of exposure to fluctuations
in interest rates.

119

---



From time to time, we may utilize foreign exchange forward contracts and currency swaps to hedge foreign currency denominated purchase and sale commitments and
certain of our net investments in foreign operations. These contracts and swaps allow us to potentially hedge our position against currency exchange rate fluctuations and would qualify as derivatives.

Cinergyhas exposure to fluctuations in exchange rates between the U.S. dollar and the currencies of foreign countries where we have
investments. When it is appropriate we will hedge our exposure to
cash flow transactions, such as a dividend payment by one of our foreign subsidiaries. As of December 31, 2001, we had no outstanding foreign currency derivatives.

(b)Fair Value of Other Financial Instruments

The estimated fair values of other financial instruments were as follows (this information does not claim to be a valuation of the companies as a whole):

|                                                                                                                |  | December 31, 2001 |       | December 31, 2000
|--------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----- | -----------------
|
|
|Cinergy(1)                                                                                                      |  |                   |       |                  
|First mortgage bonds and other long-term debt (includes amounts reflected asLong-term debt due within one year) |  | $                 | 3,745 |                  
|CG&Eand subsidiaries                                                                                            |  |                   |       |                  
|First mortgage bonds and other long-term debt (includes amounts reflected asLong-term debt due within one year) |  | $                 | 1,205 |                  
|PSI                                                                                                             |  |                   |       |                  
|First mortgage bonds and other long-term debt (includes amounts reflected asLong-term debt due within one year) |  | $                 | 1,348 |                  
|ULH&P                                                                                                           |  |                   |       |                  
|Other long-term debt                                                                                            |  | $                 | 75    |                  

---

The
following methods and assumptions were used to estimate the fair values of each major class of instruments:



Due to the short period to maturity, the carrying amounts reflected on the Balance Sheets approximate fair values.



The fair values of long-term debt issues were estimated based on the latest quoted market prices or, if not listed on the New York Stock Exchange, on
the present value of future cash flows. The discount rates used approximate the incremental borrowing costs for similar instruments.

120

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(c)Concentrations of Credit Risk

Credit risk is the exposure to economic loss that would occur as a result of nonperformance by counterparties, pursuant to the terms of their contractual
obligations. Specific components of credit risk include counterparty default risk, collateral risk, concentration risk, and settlement risk.



Our concentration of credit risk with respect to trade accounts receivable from electric and gas retail customers is limited. The large number of customers and
diversified customer base of residential, commercial, and industrial customers significantly reduces our credit risk. Contracts within the physical portfolio of power marketing and trading operations
are primarily with the traditional electric cooperatives and municipalities and other investor-owned utilities. At December 31, 2001, we do not believe we had significant exposure to credit
risk with our trade accounts receivable or our physical portfolio.



Cinergy'sextension of credit for energy marketing and trading is governed by a Corporate Credit Policy. Written
guidelines document the management approval levels for credit limits, evaluation of creditworthiness and credit risk mitigation procedures. Exposures to credit risks are monitored daily by the
Corporate Credit Risk function. As of December 31, 2001, approximately 97% of the credit exposure related to energy trading and marketing activity was with counterparties rated Investment Grade
or higher. Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity. Because of these issues, credit risk is generally greater than with other commodity trading.

In
December 2001, Enron Corp. (Enron) filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. We decreased our trading activities
with Enron in the months prior to its bankruptcy filing. We intend to resolve any contract differences pursuant to the terms of those contracts, business practices and the applicable provisions of the
Bankruptcy Code, as approved by the court. While we cannot predict the courts resolution of these matters, we do not believe that any exposure relating to those contracts would have a material impact
on our financial position or results of operations. While most of our contracts with Enron were considered trading and thus recorded at fair value, a few contracts were accounted for utilizing the
normal exemption under Statement 133 (see Note 1(k)). These contracts were recognized at fair value when the contracts were terminated in the fourth quarter of 2001. Fair value for these
contracts, and all terminated contracts with Enron, is governed by the provisions of each contract, but typically approximates fair value at contract termination. However, the effect of the loss of
Enron's participation in the energy markets on long-term liquidity and price volatility, or on the creditworthiness of common counterparties cannot be determined. We continually review and
monitor our credit exposure to all counterparties and adjust the fair value of our position, as appropriate.



Potential exposure to credit risk also exists from our use of financial derivatives such as currency swaps, foreign exchange forward contracts, and interest rate
swaps. Because these financial instruments are transacted only with highly rated financial institutions, we do not anticipate nonperformance by any of the counterparties.

10. Pension and Other Postretirement Benefits

We provide benefits to retirees in the form of pensions and other postretirement benefits.

121

---

Our
defined benefit pension plans cover substantially all U.S. employees meeting certain minimum age and service requirements. A final average pay formula determines plan benefits. These
plan benefits are based on:



Our
pension plan funding policy for U.S. employees is to contribute at least the amount required by the Employee Retirement Income Security Act of 1974, and up to the amount deductible
for income tax purposes. The pension plans' assets consist of investments in equity and fixed income securities.

We
provide certain health care and life insurance benefits to retired U.S. employees and their eligible dependents. These benefits are subject to minimum age and service requirements.
The health care benefits include medical coverage, dental coverage, and prescription drugs and are subject to certain limitations, such as deductibles and co-payments. Neither CG&EnorULH&Ppre-fund their obligations for these postretirement benefits. In 1999, PSIbegan pre-funding its obligations through a grantor trust as authorized by the
IURC.

In
2000,Cinergyoffered early retirement plans to certain individuals under a Limited Early Retirement Program (LERP). In accordance with
Statement of Financial Accounting Standards No. 88,Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits(Statement 88),Cinergyrecognized a one-time expense of $12.8 million in 2000.

Our
benefit plans' costs for the past three years, as well as the actuarial assumptions used in determining these costs, included the following components:

|                                              |                                      | Pension Benefits |       | Other Postretirement Benefits |  
|--------------------------------------------- | ------------------------------------ | ---------------- | ----- | ----------------------------- | -
|
|
|Service cost                                  |                                      | $                | 27.9  |                               | $
|Interest cost                                 |                                      |                  | 77.5  |                               |  
|Expected return on plans' assets              |                                      |                  | (81.9 | )                             |  
|Amortization of transition (asset) obligation |                                      |                  | (1.3  | )                             |  
|Amortization of prior service cost            |                                      |                  | 4.6   |                               |  
|Recognized actuarial (gain) loss              |                                      |                  | (3.2  | )                             |  
|LERP Statement 88 cost                        |                                      |                  |      |                               |  
|                                              |                                      |                  |       |                               |  
|Net periodic benefit cost                     |                                      | $                | 23.6  |                               | $
|Actuarial assumptions:                        |                                      |                  |       |                               |  
|                                              | Discount rate                        |                  |       | 7.50                          | %
|                                              | Rate of future compensation increase |                  |       | 4.00                          |  
|                                              | Rate of return on plans' assets      |                  |       | 9.25                          |  

For measurement purposes, we assumed an eight percent annual rate of increase in the per capita cost of covered health care benefits for 2001. It
was assumed that the rate would decrease gradually to five percent in 2008 and remain at that level thereafter.

122

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The
following table provides a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ended December 31,
2001, and a statement of the funded status as of December 31 of both years.

|                                                 |  | Pension Benefits |         | Other Postretirement
Benefits |  
|------------------------------------------------ |  | ---------------- | ------- | ----------------------------- | -
|
|
|Change in benefit obligation                     |  |                  |         |                               |  
|Benefit obligation at beginning of period        |  | $                | 1,064.5 |                               | $
|Service cost                                     |  |                  | 27.9    |                               |  
|Interest cost                                    |  |                  | 77.5    |                               |  
|Amendments(1)                                    |  |                  | 18.0    |                               |  
|Actuarial (gain) loss                            |  |                  | (43.6   | )                             |  
|Benefits paid                                    |  |                  | (60.8   | )                             |  
|                                                 |  |                  |         |                               |  
|Benefit obligation at end of period              |  |                  | 1,083.5 |                               |  
|Change in plan assets                            |  |                  |         |                               |  
|Fair value of plan assets at beginning of period |  |                  | 1,043.6 |                               |  
|Actual return on plan assets                     |  |                  | (108.1  | )                             |  
|Employer contribution                            |  |                  | 0.7     |                               |  
|Benefits paid                                    |  |                  | (60.8   | )                             |  
|                                                 |  |                  |         |                               |  
|Fair value of plan assets at end of period       |  |                  | 875.4   |                               |  
|Funded status                                    |  |                  | (208.1  | )                             |  
|Unrecognized prior service cost                  |  |                  | 50.0    |                               |  
|Unrecognized net actuarial (gain) loss           |  |                  | (100.1  | )                             |  
|Unrecognized net transition (asset) obligation   |  |                  | (3.2    | )                             |  
|                                                 |  |                  |         |                               |  
|Accrued benefit cost at December 31              |  | $                | (261.4  | )                             | $

---

Assumed
health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:

One-Percentage-
Point Increase

One-Percentage-
Point Decrease(in millions)Effect on total of service and interest cost components

$
3.2

$
(2.8
)Effect on postretirement benefit obligation


34.7


(30.3
)


In
addition, we sponsor non-qualified pension plans (plans that do not meet the criteria for tax benefits) that cover officers, certain other key employees, and
non-employee directors. We began funding certain of these non-qualified plans through a rabbi trust in 1999.

123

---

The
pension benefit obligations and pension cost under these plans were as follows:

2001

2000(in millions)Pension benefit obligation

$
70.9

$
67.0Pension cost


8.7


8.3


11. Disposition of Unconsolidated Subsidiary

On July 15, 1999, we sold our 50% ownership interest in Midlands Electricity plc (Midlands) to GPU, Inc. In exchange for our interest in Midlands,
we received 452.5 million pounds sterling (approximately $700 million). As a result of the transaction, we realized a net contribution to earnings of approximately $.43 EPS and
EPS-assuming dilution, after deducting financing, transaction, and currency costs.

The
pro forma information presented below reflectsCinergy'snet income and EPS without the investment in Midlands for 1999.

Year Ended December 31
1999Net Income

EPS(1)(in millions, except
for earnings per share)Reported results

$
404

$
2.54Pro forma adjustments:Equity in earnings of Midlands


(58
)Gain on sale of investment in Midlands


(99
)Interest


21Income taxes


40Pro forma results

$
308

$
1.94


---

124

---

12. Income Taxes

The following table shows the significant components ofCinergy's, CG&E's, andPSI'snet deferred income tax liabilities as of December 31, 2001, and 2000:

|                                    |                                                | Cinergy(1) |         | CG&E and subsidiaries |   | PSI    
|----------------------------------- | ---------------------------------------------- | ---------- | ------- | --------------------- | - | -------
|
|
|Deferred Income Tax Liability       |                                                |            |         |                       |   |        
|                                    | Property, plant, and equipment                 |            | $       | 1,172.0               |   | $      
|                                    | Unamortized costs of reacquiring debt          |            |         | 13.4                  |   |        
|                                    | Deferred operating expenses and carrying costs |            |         | 10.3                  |   |        
|                                    | Purchased power tracker                        |            |         | 9.7                   |   |        
|                                    | RTC                                            |            |         | 206.0                 |   |        
|                                    | Net energy risk management assets              |            |         | 12.2                  |   |        
|                                    | Amounts due from customersincome taxes        |            |         | 22.9                  |   |        
|                                    | Gasification services agreement buyout costs   |            |         | 92.3                  |   |        
|                                    | Other                                          |            |         | 47.6                  |   |        
|                                    |                                                |            |         |                       |   |        
|Total Deferred Income Tax Liability |                                                |            | 1,586.4 |                       |   | 1,466.2
|Deferred Income Tax Asset           |                                                |            |         |                       |   |        
|                                    | Unamortized investment tax credits             |            |         | 45.9                  |   |        
|                                    | Accrued pension and other benefit costs        |            |         | 162.4                 |   |        
|                                    | Net energy risk management liabilities         |            |         |                      |   |        
|                                    | Rural Utilities Service (RUS) obligation       |            |         | 28.2                  |   |        
|                                    | Other                                          |            |         | 48.5                  |   |        
|                                    |                                                |            |         |                       |   |        
|Total Deferred Income Tax Asset     |                                                |            | 285.0   |                       |   | 280.2  
|Net Deferred Income Tax Liability   |                                                | $          | 1,301.4 |                       | $ | 1,186.0

---

We
will file a consolidated federal income tax return for the year ended December 31, 2001. The current tax liability is allocated among the members of the Cinergyconsolidated group, pursuant to
a tax sharing agreement filed with the SEC under the PUHCA.

125

---

The following table summarizes federal and state income taxes charged (credited) to income forCinergy, CG&E, andPSI:

|                                    |         | Cinergy(1)                                                          |       | CG&E and subsidiaries |       | PSI   |      
|----------------------------------- | ------- | ------------------------------------------------------------------- | ----- | --------------------- | ----- | ----- | -----
|
|
|Current Income Taxes                |         |                                                                     |       |                       |       |       |      
|                                    | Federal |                                                                     | $     | 122.4                 |       | $     | 187.3
|                                    | State   |                                                                     |       | 9.3                   |       |       | 16.9 
|                                    |         |                                                                     |       |                       |       |       |      
|Total Current Income Taxes          |         |                                                                     | 131.7 |                       |       | 204.2 |      
|Deferred Income Taxes               |         |                                                                     |       |                       |       |       |      
|                                    | Federal |                                                                     |       |                       |       |       |      
|                                    |         | Depreciation and other property, plant, and equipment-related items |       |                       | 42.7  |       |      
|                                    |         | Pension and other benefit costs                                     |       |                       | (11.8 | )     |      
|                                    |         | Deferred excise taxes                                               |       |                       | 14.5  |       |      
|                                    |         | Unrealized energy risk management transactions                      |       |                       | 44.0  |       |      
|                                    |         | Fuel costs                                                          |       |                       | 5.7   |       |      
|                                    |         | Purchased power tracker                                             |       |                       | 8.5   |       |      
|                                    |         | Gasification services agreement buyout costs                        |       |                       | (2.2  | )     |      
|                                    |         | Othernet                                                           |       |                       | 16.1  |       |      
|                                    |         |                                                                     |       |                       |       |       |      
|Total Deferred Federal Income Taxes |         |                                                                     | 117.5 |                       |       | 55.3  |      
|                                    | State   |                                                                     |       | 15.4                  |       |       | 1.7  
|                                    |         |                                                                     |       |                       |       |       |      
|Total Deferred Income Taxes         |         |                                                                     | 132.9 |                       |       | 57.0  |      
|Investment Tax CreditsNet          |         |                                                                     | (9.1  | )                     |       | (9.6  | )    
|                                    |         |                                                                     |       |                       |       |       |      
|Total Income Taxes                  |         | $                                                                   | 255.5 |                       | $     | 251.6 |      

---

126

---

The following table presents a reconciliation of federal income taxes (which are calculated by multiplying the statutory federal income tax rate
by book income before federal income tax) to the federal income tax expense reported in the Statements of Income forCinergy, CG&E, andPSI.

|                                                |                                                                           | Cinergy(1) |       | CG&Eand subsidiaries |   | PSI   |     
|----------------------------------------------- | ------------------------------------------------------------------------- | ---------- | ----- | -------------------- | - | ----- | ----
|
|
|Statutory federal income tax provision          |                                                                           | $          | 235.6 |                      | $ | 221.3 |     
|Increases (Reductions) in taxes resulting from: |                                                                           |            |       |                      |   |       |     
|                                                | Amortization of investment tax credits                                    |            |       | (9.1                 | ) |       | (9.6
|                                                | Depreciation and other property, plant, and equipment-related differences |            |       | 3.2                  |   |       | 17.7
|                                                | Preferred dividend requirements of subsidiaries                           |            |       | 1.2                  |   |       | 1.6 
|                                                | Foreign tax adjustments                                                   |            |       | (1.3                 | ) |       |    
|                                                | Othernet                                                                 |            |       | 1.2                  |   |       | 2.0 
|                                                |                                                                           |            |       |                      |   |       |     
|Federal Income Tax Expense                      |                                                                           | $          | 230.8 |                      | $ | 233.0 |     
|                                                |                                                                           |            |       |                      |   |       |     

---

The following table shows the significant components ofULH&P'snet deferred income tax liability
as of December 31, 2001 and 2000:

ULH&P2001

2000(in thousands)Deferred Income Tax LiabilityProperty, plant, and equipment

$
34,218

$
32,674Unamortized costs of reacquiring debt


699


747Deferred fuel costs





6,934Other


4,158


3,620Total Deferred Income Tax Liability


39,075


43,975Deferred Income Tax AssetUnamortized investment tax credits


1,035


1,309Amounts due to customers-income taxes


2,524


2,627Deferred fuel costs


520


Accrued pension and other benefit costs


3,947


2,660Other


2,726


1,557Total Deferred Income Tax Asset


10,752


8,153Net Deferred Income Tax Liability

$
28,323

$
35,822


127

---

The
following table summarizes federal and state income taxes charged (credited) to income forULH&P:

ULH&P2001

2000

1999(in thousands)Current Income TaxesFederal

$
23,109

$
5,003

$
8,668State


(2,293
)

(129
)

2,253Total Current Income Taxes


20,816


4,874


10,921Deferred Income TaxesFederalDepreciation and other property, plant, and equipment-related items


1,042


1,059


831Pension and other benefit costs


(140
)

(605
)

40Fuel costs


(7,338
)

8,564


(1,385
)Unamortized costs of reacquiring debt


(30
)

(30
)

(39
)Service company allocations


192


251


324Othernet


212


(338
)

(155
)Total Deferred Federal Income Taxes


(6,062
)

8,901


(384
)Deferred State Income Taxes


(781
)

303


(76
)Total Deferred Income Taxes


(6,843
)

9,204


(460
)Investment Tax CreditsNet


(274
)

(277
)

(277
)Total Income Taxes

$
13,699

$
13,801

$
10,184


The
following table presents a reconciliation of federal income taxes (which are calculated by multiplying the statutory federal income tax rate by book income before federal income tax)
to the federal income tax expense reported in the Statements of Income forULH&P.

ULH&P2001

2000

1999(in thousands)Statutory federal income tax provision

$
18,444

$
13,391

$
7,098Increases (Reductions) in taxes resulting from:Amortization of investment tax credits


(274
)

(277
)

(277
)Depreciation and other property, plant, and equipment-related differences


23


830


94Othernet


(1,420
)

(317
)

1,092Federal Income Tax Expense

$
16,773

$
13,627

$
8,007


128

---

13. Commitments and Contingencies

(a)Construction and Other Commitments

Forecasted construction and other committed expenditures, including AFUDC, for the year 2002 and for the five-year period 2002-2006 (in
nominal dollars) are presented in the table below:

2002

2002-2006(in millions)Cinergy(1)

$
889

$
3,070CG&Eand subsidiaries


275


1,135PSI


478


1,522ULH&P


43


212


---

This
forecast includes an estimate of expenditures in accordance with the companies' plans regarding nitrogen oxide (NOX) emission control standards and other environmental
compliance (excluding implementation of the tentative U.S. Environmental Protection Agency (EPA) Agreement), as discussed below.

(b)Guarantees

Cinergy Corp.has made separate guarantees to certain counterparties regarding performance of commitments by our consolidated
subsidiaries, unconsolidated subsidiaries and joint ventures. We are subject to an SEC order under PUHCA, which limits the amount we can have outstanding under guarantees at any one time to
$2 billion. As of December 31, 2001, we had $558 million outstanding under the guarantees issued, of which approximately 70% represents guarantees of obligations reflected on Cinergy'sConsolidated Balance Sheet. These outstanding guarantees relate to subsidiary and joint venture indebtedness and performance commitments.

(c)Ozone Transport Rulemakings

In June 1997, the Ozone Transport Assessment Group, which consisted of 37 states, made a wide range of recommendations to the EPA to address the impact of
ozone transport on serious non-attainment areas (geographic areas defined by the EPA as non-compliant with ozone standards) in the Northeast, Midwest, and South. Ozone
transport refers to wind-blown movement of ozone and ozone-causing materials across city and state boundaries. In late 1997, the EPA published a proposed call for revisions to State
Implementation Plans (SIPs) for achieving emissions reductions to address air quality concerns. The EPA must approve all SIPs.



In October 1998, the EPA finalized its ozone transport rule, also known as the NOX SIP Call. It applied to 22 states in the Eastern half of the
U.S., including the three states in which our electric utilities operate, and proposed a model NOX emission allowance-trading program. This rule recommended states reduce NOX
emissions primarily from industrial and utility sources to a certain level by May 2003. The EPA gave the affected states until September 30, 1999, to incorporate 
NOX reductions and, at the discretion of the state, a NOX trading program into their SIPs. The EPA proposed to implement a federal plan to accomplish the equivalent
NOX reductions by May 1, 2003, if states failed to revise their SIPs.

Ohio,
Indiana, a number of other states, and various industry groups (some of which we are a member), filed legal challenges to the NOX SIP Call with the U.S. Circuit Court
of Appeals for the District of Columbia (Court of Appeals).

129

---

Following
a number of rulings and appeals, in August 2000, the Court of Appeals extended the deadline for NOX reductions to May 31, 2004. The states and other
groups sought review of the Court of Appeals ruling by the U.S. Supreme Court (Supreme Court). In March 2001, the Supreme Court decided not to grant that review.

In
June 2001, the Court of Appeals remanded portions of the NOX SIP Call to the EPA for reconsideration of how growth was factored into the state NOX
budgets. It is unclear whether this decision will result in an increase or decrease in the size of the NOX reduction requirement. On August 3, 2001, the EPA published, in the
Federal Register, a notice of data availability for justification of the state NOX budgets. Comments on the justification were filed prior to the September 19, 2001 deadline by
various industry groups (some of which we are members) and states.

The
states of Indiana and Kentucky developed final NOX SIP rules in response to the NOX SIP Call, through cap and trade programs, in June and July of 2001,
respectively. On November 8, 2001, the EPA approved Indiana's SIP rules which became effective December 10, 2001. The EPA is expected to approve Kentucky's rules in the near future. The
state of Ohio is still in the process of developing its NOX SIP rules in response to the NOX SIP Call.Cinergy'scurrent plans
for compliance with the EPA's NOX SIP Call would also satisfy compliance with Indiana's SIP rules and Kentucky's proposed rules.

On
September 25, 2000,Cinergyannounced a plan for its subsidiaries,CG&Eand PSI, to invest in
pollution control equipment and other methods to reduce NOX emissions. The current estimate of additional expenditures for
this investment is approximately $550 million (in nominal dollars) and includes the following:



SCRs
are the most proven technology currently available for reducing NOX emissions produced in coal-fired generating stations.



In February 1998, several northeast states filed petitions seeking the EPA's assistance in reducing ozone in the Eastern U.S. under Section 126 of
the Clean Air Act (CAA). The EPA believes that Section 126 petitions allow a state to claim that sources in another state are contributing to its air quality problem and request that the EPA
require the upwind sources to reduce their emissions.

In
December 1999, the EPA granted four Section 126 petitions relating to NOX emissions. This ruling affected all of our Ohio and Kentucky facilities, as well as
some of our Indiana facilities, and requires us to reduce our NOX emissions to a certain level by May 2003. In May 2001, the Court of Appeals substantially upheld a challenge
to the Section 126 requirements, and remanded portions of the rule to
the EPA for reconsideration of how growth was factored into the emission limitations. On August 24, 2001, the Court of Appeals temporarily suspended the Section 126 compliance deadline,
pending the EPA's reconsideration of growth factors. On January 19, 2002, the EPA issued a memorandum to all Regional Air Division Directors confirming that the Agency would extend the
Section 126 rule compliance deadline to May 31, 2004, thus harmonizing the deadline with that for NOX SIP Call.

130

---



On November 15, 1999, the states of Indiana and Kentucky (along with Jefferson County, Kentucky) jointly filed an amendment to their attainment
demonstration on how they intend to bring the Greater Louisville Area, (including Floyd and Clark Counties in Indiana), into attainment with the one-hour ozone standard. The Greater
Louisville Area has since attained the one-hour ozone standard, and on October 23, 2001, the EPA re-designated the area as being in attainment with that standard.
Previous SIP amendments called for, among other things, statewide NOX reductions from utilities in Indiana, Kentucky, and surrounding states which are less stringent than the EPA's
NOX SIP Call. Indiana and Kentucky committed to adopt utility NOX control rules by December 2000, that would require controls be installed by May 2003. However,
Indiana halted the rulemaking for NOX controls at this level, but completed NOX SIP Call level reduction regulations. Kentucky has completed its rulemaking, and issued a final
rule that changed the compliance deadline to mirror the NOX SIP Call of May 31, 2004. However, on November 1, 2001, the intent to withdraw the regulation was noted in the
Kentucky Administrative Register.

See
(f) below for a discussion of the tentative EPA Agreement, the implementation of which could affect our strategy for compliance with the final NOX SIP Call.

(d)New Source Review (NSR)

The CAA's NSR provisions require that a company obtain a pre-construction permit if it plans to build a new stationary source of pollution or make a
major modification to an existing facility, unless the changes are exempt. In July 1998, the EPA requested comments on proposed revisions to the NSR rules that could have the affect of changing
NSR applicability by limiting exemptions contained in the current regulation. On June 22, 2001, the EPA issued an NSR 90-Day Review Paper and scheduled four public forums across the
U.S. to gather more information on the impacts of NSR.Cinergyprovided oral testimony at an EPA public forum held in Cincinnati, Ohio, on
July 10, 2001, and submitted written comments as well.

Since
July 1999,CG&EandPSIhave received requests from the EPA (Region 5), under
Section 114 of the CAA, seeking documents and information regarding capital and maintenance expenditures at several of their respective generating stations. These requests were part of an
industry-wide investigation assessing compliance with the NSR and the New Source Performance Standards (NSPS) of the CAA at electric generating stations.

On
September 15, 1999, November 3, 1999, and February 2, 2001, the Attorneys General of New York, Connecticut, and New Jersey, respectively, issued letters notifying CinergyandCG&Eof their intent to sue under the citizens' suit provisions of the CAA. These states
allege violations of the CAA by constructing and continuing to operate a major modification ofCG&E'sW.C. Beckjord Generating Station (Beckjord
Station) without obtaining the required NSR pre-construction permits.

On
November 3, 1999, the EPA sued a number of holding companies and electric utilities, includingCinergy, CG&E, andPSI, in various U.S. District Courts (District Court). The Cinergy,CG&E, andPSIsuit alleged violations of the
CAA at two of our generating stations relating to NSR and NSPS requirements. The suit sought (1) injunctive relief to require installation of pollution control technology on each of the
generating units at Beckjord Station and atPSI'sCayuga Generating Station (Cayuga Station), and (2) civil penalties in amounts of up to $27,500
per day for each violation.

On
March 1, 2000, the EPA filed an amended complaint againstCinergy,CG&E, and PSI. The amended
complaint added alleged violations of the NSR requirements of the CAA at two of our generating stations contained in a notice of
violation (NOV) filed by the EPA on November 3, 1999. It also added claims for relief of alleged violations of nonattainment NSR, Indiana and Ohio SIPs, and particulate matter emission limits
(as discussed below in the "Beckjord Station NOV" section).

131

---

The
amended complaint sought (1) injunctive relief to require installation of pollution control technology on each of the generating units at Beckjord Station and PSI'sCayuga Station, Wabash River
Generating Station, and Gallagher Generating Station, and such other measures as necessary, and (2) civil
penalties in amounts of up to $27,500 per day for each violation.

On
March 1, 2000, the EPA also filed an amended complaint in a separate lawsuit alleging violations of the CAA relating to NSR, Prevention of Significant Deterioration (PSD), and
Ohio SIP requirements regarding various generating stations, including a generating station operated by the Columbus Southern Power Company (CSP) and jointly-owned by CSP, the Dayton Power and Light
Company (DP&L), andCG&E. The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. This suit is being
defended by CSP. On April 4, 2001, the District Court in that case ruled that neither the Government nor the intervening plaintiff environmental groups could obtain civil penalties for any
alleged violations that occurred more than five years prior to the filing of the complaint, but that both parties could seek injunctive relief for alleged violations that occurred more than five years
before the filing of the complaint. Thus, if the plaintiffs prevail in their claims, any
calculation for penalties will not start on the date of the alleged violations, unless those alleged violations occurred after November 3, 1994, but CSP would be forced to install the controls
required under the CAA. Neither party appealed that decision.

On
June 28, 2000, the EPA issued an NOV toCinergy,CG&E, and PSIfor alleged violations of NSR, PSD,
and SIP requirements atCG&E'sMiami Fort Generating Station
(Miami Fort Station) andPSI'sGibson Generating Station (Gibson Station). In addition,Cinergyand CG&Ehave been informed by DP&L, the operator of J.M. Stuart Generating Station (Stuart Station), that on June 30, 2000, the EPA issued an NOV to
DP&L for alleged violations of NSR, PSD, and SIP requirements at this station.CG&Eowns 39% of Stuart Station. The NOVs indicated that the EPA may
(1) issue an order requiring compliance with the requirements of the SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each
violation.

On
August 2, 2001, the states of New York, New Jersey, and Connecticut filed an Assented to Motion to Intervene in this litigation. Their motion was granted by the District Court
on August 3, 2001. The states' proposed complaint is an exhibit to the motion to intervene.Cinergy, CG&E, andPSIare in the process of evaluating the states' complaint but, at this time, are unable to
determine the effect, if any, this filing will have on the issues affecting us regarding NSR, as framed in the EPA's Amended Complaint.

See
(f) below for a discussion of the tentative EPA Agreement, which relates to matters discussed within this note.

(e)Beckjord Station NOV

On November 30, 1999, the EPA filed an NOV againstCinergyand CG&E, alleging that
emissions of particulate matter at the Beckjord Station exceeded the allowable limit. The NOV indicated that the EPA may
(1) issue an administrative penalty order, or (2) file a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. The allegations
contained in this NOV were incorporated within the March 1, 2000 amended complaint, as discussed in (d) above. On June 22, 2000, the EPA issued an NOV and a finding of violation
(FOV) alleging additional particulate emission violations at Beckjord Station and offered us an opportunity to meet and discuss the allegations and corrective measures. The NOV/FOV indicated the EPA
may issue an administrative compliance order, issue an administrative penalty order, or bring a civil or criminal action.

See
(f) below for a discussion of the tentative EPA Agreement, which relates to matters discussed within this note.

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(f)EPA Agreement

On December 21, 2000,Cinergy,CG&E, and PSIreached an agreement in principle with the EPA, the U.S. Department of Justice (Justice Department), three northeast states, and two environmental
groups that could serve as the basis for a negotiated resolution of CAA claims and other related matters brought against coal-fired power plants owned and operated by Cinergy'soperating subsidiaries.
The complete resolution of these issues is contingent upon establishing a final agreement with the EPA and other
parties. If a final agreement is reached with these parties, it would resolve past claims of NSR violations as well as the Beckjord Station NOVs/FOV discussed previously under (d) and (e).

Under
the terms of the tentative agreement, the EPA and the other plaintiffs have agreed to drop all challenges of past maintenance and repair activities at our coal-fired
generation plants. In addition, the intent of the tentative agreement is that we would be allowed to continue on-going activities to maintain reliability and availability without
subjecting the plants to future litigation regarding federal permitting requirements.

In
return for resolution of claims regarding past maintenance activities as well as future operational certainty, and demand growth, we have tentatively agreed to:



The
estimated cost for these capital expenditures is expected to be approximately $700 million. These capital expenditures are in addition to our previously announced commitment
to install NOX controls over the next four years as previously discussed in "Ozone Transport Rulemaking".

In
reaching the tentative agreement, we did not admit any wrongdoing and remain free to continue our current maintenance practices, as well as implement future projects for improved
reliability.

In
January 2002, the Justice Department completed its review of NSR, after considering dismissal of the lawsuits, and decided to pursue the pending lawsuits, including the suit
againstCinergy,CG&E, andPSI. We will continue to
pursue a negotiated settlement of these lawsuits if that continues to be in the best interests of the company. If the settlement is not completed, we intend to defend against the allegations,
discussed in (d) and (e) above, vigorously in court. In such an event, it is not possible to determine the likelihood that the plaintiffs would prevail on their claims or whether
resolution of these matters would have a material effect on our financial condition or results of operations.

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(g)Manufactured Gas Plant (MGP) Sites



Prior to the 1950s, gas was produced at MGP sites through a process that involved the heating of coal and/or oil. The gas produced from this process was sold for
residential, commercial, and industrial uses.



Coal tar residues, related hydrocarbons, and various metals associated with MGP sites have been found at former MGP sites in Indiana, including at least 21 sites
whichPSIor its predecessors previously owned.PSIacquired four of the sites from Northern Indiana
Public Service Company (NIPSCO) in 1931. At the same time,PSIsold NIPSCO the sites located in Goshen and Warsaw, Indiana. In 1945, PSIsold 19 of these
sites (including the four sites it acquired from NIPSCO) to the predecessor of the Indiana Gas Company, Inc. (IGC). IGC
later sold the site located in Rochester, Indiana to NIPSCO.

IGC
(in 1994) and NIPSCO (in 1995) both made claims againstPSI. The basis of these claims was that PSIis a Potentially Responsible Party with respect to the
21 MGP sites under the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA). The claims further asserted thatPSIwas legally responsible for the costs of investigating and remediating the sites. In August 1997,
NIPSCO filed suit againstPSIin federal court, claiming recovery (pursuant to CERCLA) of NIPSCO's past and future costs of investigating and
remediating MGP-related contamination at the Goshen MGP site.

In
November 1998, NIPSCO, IGC, andPSIentered into a Site Participation and Cost Sharing Agreement (Agreement). This Agreement
allocated CERCLA liability for past and future costs at seven MGP sites in Indiana among the three companies. As a result of the Agreement, NIPSCO's lawsuit against PSIwas dismissed. The parties have
assigned lead responsibility for managing further
investigation and remediation activities at each of the sites to one of the parties. Similar agreements were reached between IGC andPSIthat allocate
CERCLA liability at 14 MGP sites with which NIPSCO was not involved. These agreements concluded all CERCLA and similar claims between the three companies related to MGP sites. The parties continue to
investigate and remediate the sites, as appropriate under the agreements and applicable laws. The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of some of
the sites.

PSInotified its insurance carriers of the claims related to MGP sites raised by IGC, NIPSCO, and IDEM. In April 1998, PSIfiled suit in Hendricks County Circuit
Court in the State of Indiana against its general liability insurance carriers. Subsequently,PSIsought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI, or (2) payPSI'scosts of defense and compensate PSIfor its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP
sites. The lawsuit was
moved to the Hendricks Superior Court (Superior Court) in July 1998. Discovery closed in the case at the end of August 2001.PSIand its
insurance carriers filed briefs on various issues for decision by the Superior Court in hearings held in November 2001. In December 2001, the Superior Court rescheduled the trial to
June 2002. On February 1, 2002, the Superior Court issued rulings on motions for summary judgment. The Superior Court granted the motions of several insurance carriers who claimed that
there was insufficient evidence concerning the terms of their policies. The insurance policies in question were between 1950-1958 and 1961-1964. With respect to the remaining
policies (between 1958-1961 and 1964-1984), the Superior Court denied all of the insurance carriers' motions. This included motions on the issues of Trigger of Coverage,
Expected or Intended Damage, Late Notice and Voluntary Payments. The Superior Court found triable issues of fact for the jury to decide as to the former two issues, and ruled in PSI'sfavor, as a matter
of law, on the latter two issues. The trial against the remaining insurance

134

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carriers will go forward in June 2002. At the present time,PSIcannot predict the outcome of this litigation.

PSIhas accrued costs for the sites related to investigation, remediation, and groundwater monitoring to the extent such costs are
probable and can be reasonably estimated.PSIdoes not believe it can provide an estimate of the reasonably possible total remediation costs for any
site before a remedial investigation/feasibility study has been completed. To the extent remediation is necessary, the timing of the remediation activities impacts the cost of remediation. Therefore, PSIcurrently cannot determine the total costs that may be incurred in connection with the remediation of all sites, to the extent that remediation is
required. According to current information, these future costs at the 21 Indiana MGP sites are not material to our financial condition or results of operations. Until investigation and remediation
activities have been completed on these sites, we are unable to reasonably estimate the total costs and impact on our financial position or results of operations.



CG&Eand its utility subsidiaries are aware of potential sites where MGP activities have occurred at some time in
the past. None of these sites is known to present a risk to the environment.CG&Eand
its utility subsidiaries have begun preliminary site assessments to obtain information about some of these MGP sites.

(h)Gas Customer Choice

In January 2000, Investments sold Cinergy Resources, Inc. (Resources), a former subsidiary, to Licking Rural Electrification, Inc., doing
business as The Energy Cooperative (Energy Cooperative). In February 2001,Cinergy,CG&E, and
Resources were named as defendants in three class action lawsuits relating to Energy Cooperative's removal from the Ohio Gas Customer Choice program and the failure to deliver gas to customers.
Subsequently, these class action suits were amended and consolidated into one suit.CG&Ehas been dismissed as a defendant in the consolidated suit. In
March 2001,Cinergy,CG&E, and Investments were named as defendants in a lawsuit filed by both
Energy Cooperative and Resources. This lawsuit concerns any obligations or liabilities Investments may have to Energy Cooperative following its sale of Resources. We intend to vigorously defend these
lawsuits. At the present time,Cinergycannot predict the outcome of these suits.

(i)PSI Fuel Adjustment Charge

PSIdefers fuel costs that are recoverable in future periods subject to IURC approval under a fuel recovery
mechanism. In June 2001, the IURC issued an order in aPSIfuel recovery proceeding, disallowing approximately $14 million of deferred
costs. On June 26, 2001,PSIformally requested that the IURC reconsider its disallowance decision. In August 2001, the IURC indicated
that it will reconsider its decision.PSIbelieves it has strong legal and factual arguments in its favor and that it will ultimately be permitted to
recover these costs. However,PSIcannot definitively predict the ultimate outcome of this matter.

In
June 2001,PSIfiled a petition with the IURC requesting authority to recover $16 million in under billed deferred fuel
costs incurred from March 2001 through May 2001. The IURC approved recovery of these costs subject to refund pending the findings of an investigative sub-docket. The
sub-docket was opened to investigate the reasonableness of, and underlying reasons for, the under billed deferred fuel costs. A hearing is scheduled for April 2002.

(j)Other

In compliance with an electric wholesale rate case settlement adopted by the FERC, effective February 2000, CG&Ereduced the cost
of fuel reflected in its wholesale base rates and revised its

135

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wholesale fuel adjustment factor. Beginning March 1, 2000,ULH&Pbegan passing through to retail customers the fuel costs incurred pursuant to
the revised wholesale fuel adjustment factor, but did not synchronize the cost of fuel reflected in retail base rates with the reduced cost of fuel reflected in wholesale base rates.

In
May 2001, the KPSC approved an offer of settlement byULH&P, which allows it to maintain existing retail electric base rates and
fuel adjustment clause at current levels through December 2003 and limits electric rate increases for three years thereafter, resolving all related matters previously pending before the KPSC.
The settlement also approved the proposed wholesale power supply contract betweenULH&PandCG&E,
beginning January 1, 2002, and made the necessary determinations under the PUHCA, forCG&Eto transfer its generating assets and liabilities to
an exempt wholesale generator. In connection with this settlement,ULH&Precognized revenues of approximately $7.3 million in 2001, which had
been previously reserved in 2000 subject to refund.

14. Jointly-Owned Plant

CG&E, CSP, and DP&L jointly own electric generating units and related transmission facilities. PSIis a joint-owner of Gibson Station Unit No. 5 with Wabash Valley Power Association, Inc. (WVPA), and Indiana Municipal Power Agency
(IMPA). Additionally,PSIis a joint-owner with WVPA and IMPA of certain transmission property and local facilities. These facilities constitute part of
the integrated transmission and distribution systems, which are operated and maintained byPSI. The Statements of Income reflect CG&E'sandPSI'sportions of all operating costs associated with the jointly-owned facilities.

CG&E'sandPSI'sinvestments in jointly-owned plant or facilities are as follows:

|     |                                   | Ownership
Share                    |         | Property,
Plant, and
Equipment |   | Accumulated
Depreciation |       | Construction
Work in
Progress
|---- | --------------------------------- | ---------------------------------- | ------- | ------------------------------ | - | ------------------------ | ----- | -----------------------------
|
|CG&E |                                   |                                    |         |                                |   |                          |       |                              
|     | Production:                       |                                    |         |                                |   |                          |       |                              
|     |                                   | Miami Fort Station (Units 7 and 8) |         | 64.00                          | % | $                        | 222   |                              
|     |                                   | Beckjord Station (Unit 6)          |         | 37.50                          |   |                          | 43    |                              
|     |                                   | Stuart Station(1)                  |         | 39.00                          |   |                          | 292   |                              
|     |                                   | Conesville Station (Unit 4)(1)     |         | 40.00                          |   |                          | 77    |                              
|     |                                   | Zimmer Station                     |         | 46.50                          |   |                          | 1,235 |                              
|     |                                   | East Bend Station                  |         | 69.00                          |   |                          | 336   |                              
|     |                                   | Killen Station(1)                  |         | 33.00                          |   |                          | 187   |                              
|     | Transmission                      |                                    | Various |                                |   | 84                       |       |                              
|PSI  |                                   |                                    |         |                                |   |                          |       |                              
|     | Production:                       |                                    |         |                                |   |                          |       |                              
|     |                                   | Gibson Station (Unit 5)            |         | 50.05                          |   |                          | 213   |                              
|     | Transmission and local facilities |                                    | 94.68   |                                |   | 2                        |       |                              

---

136

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15. Quarterly Financial Data (unaudited)

|             |                         |  |   |        |  | CG&Eand subsidiaries |       |  |   |      
|------------ | ----------------------- |  | - | ------ |  | -------------------- | ----- |  | - | -----
|
|
|
|
|March 31     |                         |  |   |        |  |                      |       |  |   |      
|             | Operating Revenues      |  | $ | 3,707  |  | $                    | 1,583 |  | $ | 1,258
|             | Operating Income        |  |   | 249    |  |                      | 274   |  |   | 154  
|             | Net Income              |  |   | 120    |  |                      | 138   |  |   | 82   
|             | Basic EPS               |  |   | .76    |  |                      | .87   |  |   | N/A  
|             | EPS  assuming dilution |  |   | .75    |  |                      | .87   |  |   | N/A  
|June 30      |                         |  |   |        |  |                      |       |  |   |      
|             | Operating Revenues      |  | $ | 3,642  |  | $                    | 1,770 |  | $ | 1,277
|             | Operating Income        |  |   | 178    |  |                      | 167   |  |   | 98   
|             | Net Income              |  |   | 83     |  |                      | 75    |  |   | 49   
|             | Basic EPS               |  |   | .51    |  |                      | .47   |  |   | N/A  
|             | EPS  assuming dilution |  |   | .51    |  |                      | .47   |  |   | N/A  
|September 30 |                         |  |   |        |  |                      |       |  |   |      
|             | Operating Revenues      |  | $ | 3,324  |  | $                    | 2,300 |  | $ | 1,321
|             | Operating Income        |  |   | 275    |  |                      | 196   |  |   | 166  
|             | Net Income              |  |   | 128    |  |                      | 94    |  |   | 89   
|             | Basic EPS               |  |   | .81    |  |                      | .59   |  |   | N/A  
|             | EPS  assuming dilution |  |   | .80    |  |                      | .58   |  |   | N/A  
|December 31  |                         |  |   |        |  |                      |       |  |   |      
|             | Operating Revenues      |  | $ | 2,250  |  | $                    | 2,769 |  | $ | 838  
|             | Operating Income        |  |   | 240    |  |                      | 225   |  |   | 194  
|             | Net Income              |  |   | 111    |  |                      | 92    |  |   | 107  
|             | Basic EPS               |  |   | .70    |  |                      | .58   |  |   | N/A  
|             | EPS  assuming dilution |  |   | .69    |  |                      | .58   |  |   | N/A  
|Total        |                         |  |   |        |  |                      |       |  |   |      
|             | Operating Revenues      |  | $ | 12,923 |  | $                    | 8,422 |  | $ | 4,694
|             | Operating Income        |  |   | 942    |  |                      | 862   |  |   | 612  
|             | Net Income              |  |   | 442    |  |                      | 399   |  |   | 327  
|             | Basic EPS               |  |   | 2.78   |  |                      | 2.51  |  |   | N/A  
|             | EPS  assuming dilution |  |   | 2.75   |  |                      | 2.50  |  |   | N/A  

---

---

16. Financial Information by Business Segment

We conduct operations through our subsidiaries, and manage through the following three business units:



The
following section describes the activities of our business units as of December 31, 2001.

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Energy
Merchant manages wholesale generation and the domestic and foreign energy marketing and trading of energy commodities. Energy Merchant operates and maintains our regulated and
non-regulated electric generating plants including some of our jointly-owned plants, both domestically and abroad. Energy Merchant also conducts the following activities:



Regulated
Businesses consists of a regulated, integrated utility, and regulated electric and gas transmission and distribution systems. Regulated Businesses plans, constructs, operates,
and maintainsCinergy'stransmission and distribution systems and delivers gas and electric energy to consumers, both domestically and abroad. Regulated
Businesses also earns revenues from wholesale customers primarily by transmitting electric power throughCinergy'stransmission system.

Power
Technology primarily manages the development, marketing, and sales of our non-regulated retail energy and energy-related businesses. This is accomplished through
various subsidiaries and joint ventures and includes the following products and services:



Power
Technology also manages Cinergy Ventures, LLC (Ventures),Cinergy'sventure capital subsidiary. Ventures invests in emerging energy
technologies that can benefit futureCinergybusiness development activities.

Financial
information by (1) business units, (2) products and services, and (3) geographic areas and long-lived assets for the years ending
December 31, 2001, 2000, and 1999, are as follows:

Business Units

|                                                           |                          | 2001
|---------------------------------------------------------- | ------------------------ | ----
|
|
|
|Operating revenues                                        |                          |     
|                                                           | External customers(3)    |     
|                                                           | Intersegment revenues(4) |     
|Depreciation(5)                                            |                          |     
|Equity in earnings (losses) of unconsolidated subsidiaries |                          |     
|Interest(6)                                                |                          |     
|Income taxes                                               |                          |     
|Segment profit (loss)(7)                                   |                          |     
|Total segment assets                                       |                          |     
|Investments in unconsolidated subsidiaries                 |                          |     
|Total expenditures for long-lived assets                   |                          |     

---

138

---

Business Units (cont.)

|                                                           |                       | 2000
|---------------------------------------------------------- | --------------------- | ----
|
|
|
|Operating revenues                                        |                       |     
|                                                           | External customers(3) |     
|                                                           | Intersegment revenues |     
|Depreciation(4)                                            |                       |     
|Equity in earnings (losses) of unconsolidated subsidiaries |                       |     
|Interest(5)                                                |                       |     
|Income taxes                                               |                       |     
|Segment profit (loss)(6)                                   |                       |     
|Total segment assets                                       |                       |     
|Investments in unconsolidated subsidiaries                 |                       |     
|Total expenditures for long-lived assets                   |                       |     

---

Energy
Merchant

Regulated
BusinessesOperating revenues

$
(119
)
$
119Segment profit (loss)

$
(41
)
$
41


139

---

Business Units (cont.)

|                                                           |                       | 1999
|---------------------------------------------------------- | --------------------- | ----
|
|
|
|Operating revenues                                        |                       |     
|                                                           | External customers    |     
|                                                           | Intersegment revenues |     
|Depreciation(3)                                            |                       |     
|Gain on sale of investment in unconsolidated subsidiary    |                       |     
|Equity in earnings (losses) of unconsolidated subsidiaries |                       |     
|Interest(4)                                                |                       |     
|Income taxes                                               |                       |     
|Segment profit (loss)(5)                                   |                       |     
|Total segment assets                                       |                       |     
|Investments in unconsolidated subsidiaries                 |                       |     
|Total expenditures for long-lived assets                   |                       |     

---

Products and Services(in millions)

---

|     |  | Revenues
|---- |  | --------
|
|
|2001 |  | $       
|2000 |  |         
|1999 |  |         

140

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Geographic Areas and Long-Lived Assets(in millions)

|    
|----
|
|
|
|2001
|2000
|1999

|     |  | Long-Lived Assets
|---- |  | -----------------
|
|
|2001 |  | $                
|2000 |  |                  
|1999 |  |                  

---

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17. Earnings Per Common Share

A reconciliation of EPS to EPSassuming dilution is presented below:

|                               |                                          | Income |   | Shares  |  | EPS    
|------------------------------ | ---------------------------------------- | ------ | - | ------- |  | -------
|
|Year ended December 31, 2001   |                                          |        |   |         |  |        
|EPS:                           |                                          |        |   |         |  |        
|                               | Net income                               |        | $ | 442,279 |  | 159,110
|Effect of dilutive securities: |                                          |        |   |         |  |        
|                               | Common stock options                     |        |   |         |  | 975    
|                               | Directors' compensation plans            |        |   |         |  | 152    
|                               | Contingently issuable common stock       |        |   |         |  | 810    
|                               |                                          |        |   |         |  |        
|EPS  assuming dilution:       |                                          |        |   |         |  |        
|                               | Net income plus assumed conversions      |        | $ | 442,279 |  | 161,047
|Year ended December 31, 2000   |                                          |        |   |         |  |        
|EPS:                           |                                          |        |   |         |  |        
|                               | Net income                               |        | $ | 399,466 |  | 158,938
|Effect of dilutive securities: |                                          |        |   |         |  |        
|                               | Common stock options                     |        |   |         |  | 491    
|                               | Directors' compensation plans            |        |   |         |  | 177    
|                               | Contingently issuable common stock       |        |   |         |  | 262    
|                               |                                          |        |   |         |  |        
|EPS  assuming dilution:       |                                          |        |   |         |  |        
|                               | Net income plus assumed conversions      |        | $ | 399,466 |  | 159,868
|Year ended December 31, 1999   |                                          |        |   |         |  |        
|EPS:                           |                                          |        |   |         |  |        
|                               | Net income                               |        | $ | 403,641 |  | 158,863
|Effect of dilutive securities: |                                          |        |   |         |  |        
|                               | Common stock options                     |        |   |         |  | 344    
|                               | Employee stock purchase and savings plan |        |   |         |  | 22     
|                               | Contingently issuable common stock       |        |   |         |  | 26     
|                               |                                          |        |   |         |  |        
|EPS  assuming dilution:       |                                          |        |   |         |  |        
|                               | Net income plus assumed conversions      |        | $ | 403,641 |  | 159,255

Options
to purchase shares of common stock are excluded from the calculation of EPSassuming dilution when the exercise prices of these options are greater than the average
market price of the common shares during the period. For 2001, 2000, and 1999, approximately two million shares per year were excluded from the EPSassuming dilution calculation.

18. Ohio Deregulation

On July 6, 1999, Ohio Governor Robert Taft signed Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill), beginning the transition to
electric deregulation and customer choice for the State of Ohio. The Electric Restructuring Bill created a competitive electric retail service market effective January 1, 2001. The legislation
provided for a market development period that began January 1, 2001, and ends no later than December 31, 2005.

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On
May 8, 2000,CG&Ereached a stipulated agreement with the PUCO staff and various other interested parties with respect to its
proposal to implement electric customer choice in Ohio effective January 1, 2001. On August 31, 2000, the PUCO approvedCG&E'sstipulation
agreement. The major features of the agreement include:



With
regard to the PUCO's order, two parties filed applications for rehearing with the PUCO. On October 18, 2000, the PUCO denied these applications. One of the parties appealed
to the Ohio Supreme Court in the fourth quarter of 2000 andCG&Esubsequently intervened in that case. On April 6, 2001, CG&Efiled for
dismissal of this appeal. On July 25, 2001, the Ohio Supreme Court deniedCG&E'smotion to dismiss.CG&Eis unable to predict the outcome of this proceeding.

As
indicated above, the August 31, 2000 order authorizesCG&Eto transfer its generation assets to a non-regulated
affiliate. In addition to the regulatory approvals received from the PUCO, the IURC, and the KPSC, this transfer requires the approval of the FERC and the SEC under PUHCA. On October 29, 2001, CG&Efiled an application with the FERC seeking authorization to transfer these assets. As the transfer is contingent upon CG&Ereceiving FERC approval, SEC approval under PUHCA, and various
third party consents, the timing and receipt of which are unknown, the completion
date of the transfer of generation assets to a non-regulated affiliate cannot be predicted.

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19. Comprehensive Income

The elements ofComprehensive incomeand their related tax effects for the years ended 2001, 2000 and 1999 are as
follows:

|                                        |                                                     | Comprehensive Income |        
|--------------------------------------- | --------------------------------------------------- | -------------------- | -------
|
|
|
|Cinergy(1)                              |                                                     |                      |        
|                                        | Net income                                          |                      | $      
|Other comprehensive income (loss):      |                                                     |                      |        
|                                        | Foreign currency translation adjustment             |                      |        
|                                        | Minimum pension liability adjustment                |                      |        
|                                        | Unrealized gain (loss) on investment trusts         |                      |        
|                                        | Cumulative effect of change in accounting principle |                      |        
|                                        | Cash flow hedges                                    |                      |        
|                                        |                                                     |                      |        
|Total other comprehensive income (loss) |                                                     |                      | (7,488 
|                                        |                                                     |                      |        
|Total comprehensive income              |                                                     | $                    | 690,297
|                                        |                                                     |                      |        

---

The after-tax components ofAccumulated other comprehensive income (loss)as of
December 31, 2001, 2000, and 1999 are as follows:

|                             |                                                     | Accumulated Other Comprehensive Income (Loss) Classification |       
|---------------------------- | --------------------------------------------------- | ------------------------------------------------------------ | ------
|
|
|Cinergy(1)                   |                                                     |                                                              |       
|Balance at December 31, 1998 |                                                     | $                                                            | 1,635 
|                             | Current-period change                               |                                                              |       
|                             |                                                     |                                                              |       
|Balance at December 31, 1999 |                                                     | $                                                            | (8,146
|                             | Current-period change                               |                                                              |       
|                             |                                                     |                                                              |       
|Balance at December 31, 2000 |                                                     | $                                                            | (6,072
|                             | Cumulative effect of change in accounting principle |                                                              |       
|                             | Current-period change                               |                                                              |       
|                             |                                                     |                                                              |       
|Balance at December 31, 2001 |                                                     | $                                                            | (4,431
|                             |                                                     |                                                              |       

---

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

BOARD OF DIRECTORS

Information regardingCinergy Corp.'sdirectors is incorporated by reference from its definitive Proxy Statement
for the 2002 Annual Meeting of Shareholders.

The
directors of The Cincinnati Gas & Electric Company (CG&E) at January 31, 2002, are as follows:



Additional
information on each of the directors ofCG&Eis presented in the following "Executive Officers" section.

Information
regarding PSI Energy, Inc.'s (PSI) directors is incorporated by reference from PSI's2002 Information Statement.

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EXECUTIVE OFFICERS

The names of the executive officers of each registrant, their ages (as of December 31, 2001), the positions they hold, held, or have been elected to as of
this report filing date, and their business experience during the past five years is included in the chart below.

|                    |  |    |  | Positions and Length of Service                                                                                                                                                                                                                                                                                              
|------------------- |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|Wendy Aumiller      |  | 49 |  | Acting Treasurer10/01 - present Assistant Treasurer10/00 - 10/01 General Manager, Generation Financial Planning6/00 - 10/00 Assistant Treasurer9/96 - 6/00                                                                                                                                                                   
|John Bryant(1)      |  | 55 |  | Vice President1/98 - present President, International Business Unit7/00 - 2/01                                                                                                                                                                                                                                               
|Michael J. Cyrus(2) |  | 46 |  | Executive Vice President2/01 - present Chief Executive Officer, Energy Merchant Business Unit2/01 - present President, Energy Commodities Business Unit3/99 - 2/01 Vice President4/98 - 2/01 Chief Operating Officer, Energy Commodities Business Unit11/98 - 3/99                                                           
|R. Foster Duncan(3) |  | 47 |  | Executive Vice President and Chief Financial Officer2/01 - present                                                                                                                                                                                                                                                           
|Douglas F. Esamann  |  | 44 |  | Vice President and Chief Financial Officer, Energy Merchant Business Unit2/01 - 10/01 Vice President and Chief Financial Officer, Energy Commodities Business Unit3/99 - 2/01 General Manager, Business Development, Energy Commodities Business Unit3/98 - 3/99 Finance Manager, Energy Commodities Business Unit5/96 - 3/98

147

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|Gregory C. Ficke        |  | 49 |  | Vice President and Chief Information Officer, Regulated Businesses Business Unit2/01 - 10/01 Vice President and Chief Information Officer, Energy Delivery Business Unit7/00 - 2/01 Vice President, Operations Services, Energy Delivery Business Unit4/99 - 7/00 Vice President, Gas Operations, Energy Delivery Business Unit12/98 - 4/99 General Manager, Gas Operations, Energy Delivery Business Unit8/96 - 12/98 |  | President10/01 - present                                                                                                                                                                   |  |                                                                                                                                                                      
|----------------------- |  | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|William J. Grealis(4)   |  | 56 |  | Executive Vice President7/00 - present Chief Executive Officer, Regulated Businesses Business Unit2/01 - 10/01 Chief of Staff7/00 - 2/01 Vice President, Corporate Services, and Chief Strategic Officer8/98 - 7/00 Vice President1/95 - 8/98                                                                                                                                                                          |  | Executive Vice President7/00 - present Chief of Staff7/00 - 2/01 Vice President, Corporate Services, and Chief Strategic Officer8/98 - 7/00 Vice President4/98 - 8/98 President1/95 - 3/98 |  | Executive Vice President7/00 - present Chief of Staff7/00 - 2/01 Vice President, Corporate Services, and Chief Strategic Officer8/98 - 7/00 Vice President4/98 - 8/98
|J. Joseph Hale, Jr.(5)  |  | 52 |  | Vice President12/96 - present                                                                                                                                                                                                                                                                                                                                                                                          |  | Vice President10/01 - present President7/00 - 10/01 Vice President8/98 - 7/00 General Manager, Marketing Operations1/95 - 8/98                                                             |  | Vice President10/01 - present Vice President2/00 - 7/00 Interim President6/99 - 2/00 Vice President8/98 - 6/99                                                       
|M. Stephen Harkness(6)  |  | 53 |  | Vice President12/96 - present                                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                            |  |                                                                                                                                                                      
|Donald B. Ingle, Jr.(7) |  | 52 |  | President, Power Technology and Infrastructure Services Business Unit2/01 - present President, Cinergy Investments Business Unit3/99 - 2/01 Vice President10/97 - present                                                                                                                                                                                                                                              |  | Vice President10/97 - 3/99                                                                                                                                                                 |  | Vice President10/97 - 3/99                                                                                                                                           
|Julia S. Janson         |  | 37 |  | Secretary7/00 - present Senior Counsel7/98 - present Counsel5/96 - 7/98                                                                                                                                                                                                                                                                                                                                                |  | Assistant Secretary7/00 - present Senior Counsel7/98 - present Counsel5/96 - 7/98                                                                                                          |  | Secretary7/00 - present Senior Counsel7/98 - present Counsel5/96 - 7/98                                                                                              

148

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|Bernard F. Roberts      |  | 49 |  | Vice President and Comptroller3/99 - present Vice President and Chief Financial Officer, Energy Commodities Business Unit7/96 - 3/99                                                                                                                                                                            |  | Vice President and Comptroller3/99 - present                                                                                                                                   |  | Vice President and Comptroller3/99 - present                                                                                                                                         
|----------------------- |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|James E. Rogers         |  | 54 |  | Chairman of the Board12/00 - present President and Chief Executive Officer12/95 - present Vice Chairman12/95 - 12/00                                                                                                                                                                                            |  | Chairman of the Board12/00 - present Chief Executive Officer12/95 - present Vice Chairman12/95 - 12/00                                                                         |  | Chairman of the Board12/00 - present Chief Executive Officer12/95 - present Vice Chairman12/95 - 12/00                                                                               
|Larry E. Thomas(8)      |  | 56 |  | Executive Vice President2/01 - present Chief Executive Officer, Power Technology and Infrastructure Services Business Unit2/01 - 7/01 Group President7/00 - 2/01 Vice President4/97 - 7/00 President, Energy Delivery Business Unit5/96 - 7/00 Group Vice President and Chief Transformation Officer9/95 - 4/97 |  | Executive Vice President2/01 - present Group President7/00 - 2/01 Vice President4/97 - 7/00 Group Vice President and Chief Transformation Officer9/95 - 4/97                   |  | Vice Chairman7/01 - present Executive Vice President2/01 - 7/01 Group President7/00 - 2/01 Vice President4/97 - 7/00 Group Vice President and Chief Transformation Officer9/95 - 4/97
|James L. Turner(9)      |  | 42 |  | Executive Vice President10/01 - present Chief Executive Officer, Regulated Businesses Business Unit12/01 - present President, Regulated Businesses Business Unit2/01 - 12/01 President, Energy Delivery Business Unit7/00 - 2/01 Vice President4/99 - 12/01 Senior Counsel6/95 - 3/97                           |  | Vice President7/00 - present President2/99 - 7/00                                                                                                                              |  | Vice President7/00 - present                                                                                                                                                         
|Jerome A. Vennemann     |  | 51 |  | Vice President and General Counsel1/00 - present Acting General Counsel3/99 - 1/00 Associate General Counsel2/96 - 3/99 Assistant Secretary12/94 - present                                                                                                                                                      |  | Vice President and General Counsel1/00 - present Acting General Counsel3/99 - 1/00 Secretary4/98 - present Associate General Counsel2/96 - 3/99 Assistant Secretary1/95 - 4/98 |  | Vice President and General Counsel1/00 - present Acting General Counsel3/99 - 1/00 Associate General Counsel2/96 - 3/99 Assistant Secretary12/94 - present                           
|Timothy J. Verhagen(10) |  | 55 |  | Vice President1/01 - present                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                |  |                                                                                                                                                                                      

149

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|Charles J. Winger |  | 56 |  | Vice President4/97 - present Acting Chief Financial Officer6/00 - 2/01 Chief Financial Officer4/98 - 3/99 Comptroller12/94 - 8/97 |  | Vice President and Acting Chief Financial Officer6/00 - 2/01 Vice President and Chief Financial Officer4/98 - 3/99 Vice President4/97 - 8/97 Comptroller1/95 - 8/97 |  | Vice President and Acting Chief Financial Officer6/00 - 2/01 Vice President and Chief Financial Officer4/98 - 3/99 Vice President4/97 - 8/97 Comptroller3/84 - 8/97
|----------------- |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

None of the officers are related in any manner. Our executive officers hold the offices set opposite their names until
the next annual meeting of the Board of Directors and until their successors have been elected and qualified.

---

150

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ITEM 11.    EXECUTIVE COMPENSATION

Information in response to this item forCinergy Corp.andCG&Eis
incorporated by reference fromCinergy Corp.'sdefinitive Proxy Statement for the 2002 Annual Meeting of the Shareholders.

All CG&Edirectors currently are employees ofCinergy Corp.or CG&E, and receive no compensation for their services as directors.

Information
in response to this item forPSIexecutive compensation is incorporated by reference from PSI's2002 Information Statement.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information in response to this item forCinergy Corp.is incorporated by reference from its definitive Proxy
Statement for the 2002 Annual Meeting of Shareholders.

Cinergy Corp.owns all outstanding shares of common stock ofCG&E, CG&E'sonly voting security. Pursuant to
Section 13(d) of the Securities Exchange Act of 1934, a beneficial owner of a security is any person who
directly or indirectly has or shares voting or investment power over such security. No person or group is known by the management ofCG&Eto be the
beneficial owner of more than 5% of any series ofCG&E'sclass of cumulative preferred stock as of December 31, 2001.

CG&E'sdirectors and executive officers did not beneficially own shares of any series of the class of CG&E'scumulative preferred stock as of January 31,
2002. The beneficial ownership ofCinergy

151

---

Corp.common stock by each director and named executive officer ofCG&Eas of January 31, 2002, is set forth in the
following table:

Name of Beneficial Owner(1)

Amount and Nature of
Beneficial Ownership(2)Michael J. Cyrus

213,528 sharesR. Foster Duncan

44,704 sharesWilliam J. Grealis

340,697 sharesJames E. Rogers

1,276,277 sharesLarry E. Thomas

360,589 sharesJames L. Turner

33,890 sharesAll directors and executive officers as a group (10 persons)

2,489,486 shares
(representing 1.56% of the class)


---

Information
in response to this item forPSIis incorporated by reference from its 2002 Information Statement.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information in response to this item forCinergy Corp.andCG&Eis
incorporated by reference fromCinergy Corp.'sdefinitive Proxy Statement for the 2002 Annual Meeting of Shareholders.

Information
in response to this item forPSIis incorporated by reference fromPSI's2002
Information Statement.

152

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS AND SCHEDULES

Refer to the page captioned "Index to Financial Statements and Financial Statement Schedules" for an index of the financial statements and financial statement
schedules included in this report.

REPORTS ON FORM 8-K

The following reports on Form 8-K were filed during the quarter ended December 31, 2001:

Date of Filing

Registrant(s)

Item FiledDecember 19, 2001

Cinergy Corp.

Item 5. Other Events Item 7. Financial Statements and Exhibits


EXHIBITS

The documents listed below are being filed or have previously been filed on behalf ofCinergy Corp., CG&E,PSI, and The Union Light, Heat and Power Company
(ULH&P) and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are
filed herewith:

|Exhibit
Designation                |  | Registrant(s)(1) |  | Nature of Exhibit                                                                                                                                     |  | Previously Filed as
Exhibit to:       
|---------------------------------- |  | ---------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------
|Articles of
Incorporation/
By-laws |  |                  |  |                                                                                                                                                       |  |                                       
|3-a                                |  | Cinergy Corp.    |  | Certificate of Incorporation ofCinergy Corp., a Delaware corporation, as amended December 14, 2000.                                                   |  | Cinergy Corp.March 31, 2001, Form 10-Q
|3-b                                |  | Cinergy Corp.    |  | By-Laws ofCinergy Corp., as amended on December 14, 2000.                                                                                             |  | Cinergy Corp.2000 Form 10-K           
|3-c                                |  | CG&E             |  | Amended Articles of Incorporation ofCG&Eeffective October 23, 1996.                                                                                   |  | CG&ESeptember 30, 1996, Form 10-Q     
|3-d                                |  | CG&E             |  | Regulations ofCG&E, as amended, April 25, 1996.                                                                                                       |  | CG&EMarch 31, 1996, Form 10-Q         
|3-e                                |  | PSI              |  | Amended Articles of Consolidation ofPSI, as amended April 20, 1995.                                                                                   |  | PSIJune 30, 1995, Form 10-Q           
|3-f                                |  | PSI              |  | Amendment to Article D of the Amended Articles of Consolidation ofPSI, effective July 10, 1997.                                                       |  | Cinergy Corp.1997 Form 10-K           
|3-g                                |  | PSI              |  | By-Laws ofPSI, as amended to December 17, 1996.                                                                                                       |  | PSIMarch 31, 1997, Form 10-Q          
|3-h                                |  | ULH&P            |  | Restated Articles of Incorporation made effective May 7, 1976.                                                                                        |  | ULH&PForm 8-K, May 1976               
|3-i                                |  | ULH&P            |  | By-Laws ofULH&Pas amended, adopted May 8, 1996.                                                                                                       |  | ULH&PMarch 31, 1996, Form 10-Q        
|3-j                                |  | ULH&P            |  | Amendment to Restated Articles of Incorporation ofULH&P(Article Third) and Amendment to the By-Laws ofULH&P(Article 1), both effective July 24, 1997. |  | Cinergy Corp.1997 Form 10-K           

153

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|Instruments
defining the
rights of
holders, incl.
Indentures |  |                   |  |                                                                                                                                                                                   |  |                                                                                
|------------------------------------------------------------ |  | ----------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------
|4-a                                                          |  | Cinergy Corp.
PSI |  | Original Indenture (First Mortgage Bonds) dated September 1, 1939, betweenPSIand The First National Bank of Chicago, as Trustee, and LaSalle National Bank, as
Successor Trustee. |  | Exhibit A-Part 3 in File No. 70-258 Supplemental Indenture dated March 30, 1984
|4-b                                                          |  | Cinergy Corp.
PSI |  | Twenty-fifth Supplemental Indenture betweenPSIand The First National Bank of Chicago dated September 1, 1978.                                                                     |  | File No. 2-62543                                                               
|4-c                                                          |  | Cinergy Corp.
PSI |  | Thirty-fifth Supplemental Indenture betweenPSIand The First National Bank of Chicago dated March 30, 1984.                                                                        |  | PSI1984 Form 10-K                                                              
|4-d                                                          |  | Cinergy Corp.
PSI |  | Forty-second Supplemental Indenture betweenPSIand LaSalle National Bank dated August 1, 1988.                                                                                     |  | PSI1988 Form 10-K                                                              
|4-e                                                          |  | Cinergy Corp.
PSI |  | Forty-fourth Supplemental Indenture betweenPSIand LaSalle National Bank dated March 15, 1990.                                                                                     |  | PSI1990 Form 10-K                                                              
|4-f                                                          |  | Cinergy Corp.
PSI |  | Forty-fifth Supplemental Indenture betweenPSIand LaSalle National Bank dated March 15, 1990.                                                                                      |  | PSI1990 Form 10-K                                                              
|4-g                                                          |  | Cinergy Corp.
PSI |  | Forty-sixth Supplemental Indenture betweenPSIand LaSalle National Bank dated June 1, 1990.                                                                                        |  | PSI1991 Form 10-K                                                              
|4-h                                                          |  | Cinergy Corp.
PSI |  | Forty-seventh Supplemental Indenture betweenPSIand LaSalle National Bank dated July 15, 1991.                                                                                     |  | PSI1991 Form 10-K                                                              
|4-i                                                          |  | Cinergy Corp.
PSI |  | Forty-eighth Supplemental Indenture betweenPSIand LaSalle National Bank dated July 15, 1992.                                                                                      |  | PSI1992 Form 10-K                                                              
|4-j                                                          |  | Cinergy Corp.
PSI |  | Forty-ninth Supplemental Indenture betweenPSIand LaSalle National Bank dated February 15, 1993.                                                                                   |  | PSI1992 Form 10-K                                                              
|4-k                                                          |  | Cinergy Corp.
PSI |  | Fiftieth Supplemental Indenture betweenPSIand LaSalle National Bank dated February 15, 1993.                                                                                      |  | PSI1992 Form 10-K                                                              
|4-l                                                          |  | Cinergy Corp.
PSI |  | Fifty-first Supplemental Indenture betweenPSIand LaSalle National Bank dated February 1, 1994.                                                                                    |  | PSI1993 Form 10-K                                                              
|4-m                                                          |  | Cinergy Corp.
PSI |  | Fifty-second Supplemental Indenture betweenPSIand LaSalle National Bank, as Trustee, dated as of April 30, 1999.                                                                  |  | PSIMarch 31, 1999, Form 10-Q                                                   
|4-n                                                          |  | Cinergy Corp.
PSI |  | Fifty-third Supplemental Indenture betweenPSIand LaSalle National Bank dated June 15, 2001.                                                                                       |  | Cinergy Corp.June 30, 2001, Form 10-Q                                          
|4-o                                                          |  | Cinergy Corp.
PSI |  | Indenture (Secured Medium-term Notes, Series A), dated July 15, 1991, betweenPSIand LaSalle National Bank, as Trustee.                                                            |  | PSIForm 10-K/A, Amendment No. 2, dated July 15, 1993                           
|4-p                                                          |  | Cinergy Corp.
PSI |  | Indenture (Secured Medium-term Notes, Series B), dated July 15, 1992, betweenPSIand LaSalle National Bank, as Trustee.                                                            |  | PSIForm 10-K/A, Amendment No. 2, dated July 15, 1993                           
|4-q                                                          |  | Cinergy Corp.
PSI |  | Loan Agreement betweenPSIand the City of Princeton, Indiana dated as of November 7, 1996.                                                                                         |  | PSISeptember 30, 1996, Form 10-Q                                               

154

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|4-r  |  | Cinergy Corp.
PSI  |  | Loan Agreement betweenPSIand the City of Princeton, Indiana dated as of February 1, 1997.                              |  | Cinergy Corp.1996 Form 10-K            
|---- |  | ------------------ |  | ---------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------
|4-s  |  | Cinergy Corp.
PSI  |  | Indenture dated November 15, 1996, betweenPSIand The Fifth Third Bank, as Trustee.                                     |  | Cinergy Corp.1996 Form 10-K            
|4-t  |  | Cinergy Corp.
PSI  |  | First Supplemental Indenture dated November 15, 1996, betweenPSIand The Fifth Third Bank, as Trustee.                  |  | Cinergy Corp.1996 Form 10-K            
|4-u  |  | Cinergy Corp.
PSI  |  | Third Supplemental Indenture dated as of March 15, 1998, betweenPSIand The Fifth Third Bank, as Trustee.               |  | Cinergy Corp.1997 Form 10-K            
|4-v  |  | Cinergy Corp.
PSI  |  | Fourth Supplemental Indenture dated as of August 5, 1998, betweenPSIand The Fifth Third Bank, as Trustee.              |  | PSIJune 30, 1998, Form 10-Q            
|4-w  |  | Cinergy Corp.
PSI  |  | Fifth Supplemental Indenture dated as of December 15, 1998, betweenPSIand The Fifth Third Bank, as Trustee.            |  | PSI1998 Form 10-K                      
|4-x  |  | Cinergy Corp.
PSI  |  | Sixth Supplemental Indenture dated as of April 30, 1999, betweenPSIand Fifth Third Bank, as Trustee.                   |  | PSIMarch 31, 1999, Form 10-Q           
|4-y  |  | Cinergy Corp.
PSI  |  | Seventh Supplemental Indenture dated as of October 20, 1999, betweenPSIand Fifth Third Bank, as Trustee.               |  | PSISeptember 30, 1999, Form 10-Q       
|4-z  |  | Cinergy Corp.
PSI  |  | Unsecured Promissory Note dated October 14, 1998, betweenPSIand the Rural Utilities Service.                           |  | PSI1998 Form 10-K                      
|4-aa |  | Cinergy Corp.
PSI  |  | Loan Agreement betweenPSIand the Indiana Development Finance Authority dated as of July 15, 1998.                      |  | PSIJune 30, 1998, Form 10-Q            
|4-bb |  | Cinergy Corp.
PSI  |  | Loan Agreement betweenPSIand the Indiana Development Finance Authority dated as of May 1, 2000.                        |  | PSIJune 30, 2000, Form 10-Q            
|4-cc |  | Cinergy Corp. CG&E |  | Original Indenture (First Mortgage Bonds) betweenCG&Eand The Bank of New York (as Trustee) dated as of August 1, 1936. |  | CG&ERegistration Statement No. 2-2374  
|4-dd |  | Cinergy Corp. CG&E |  | Fourteenth Supplemental Indenture betweenCG&Eand The Bank of New York dated as of November 2, 1972.                    |  | CG&ERegistration Statement No. 2-60961 
|4-ee |  | Cinergy Corp. CG&E |  | Thirty-third Supplemental Indenture betweenCG&Eand The Bank of New York dated as of September 1, 1992.                 |  | CG&ERegistration Statement No. 33-53578
|4-ff |  | Cinergy Corp. CG&E |  | Thirty-fourth Supplemental Indenture betweenCG&Eand The Bank of New York dated as of October 1, 1993.                  |  | CG&ESeptember 30, 1993, Form 10-Q      
|4-gg |  | Cinergy Corp. CG&E |  | Thirty-fifth Supplemental Indenture betweenCG&Eand The Bank of New York dated as of January 1, 1994.                   |  | CG&ERegistration Statement No. 33-52335
|4-hh |  | Cinergy Corp. CG&E |  | Thirty-sixth Supplemental Indenture betweenCG&Eand The Bank of New York dated as of February 15, 1994.                 |  | CG&ERegistration Statement No. 33-52335
|4-ii |  | Cinergy Corp. CG&E |  | Thirty-seventh Supplemental Indenture betweenCG&Eand The Bank of New York dated as of October 14, 1996.                |  | Cinergy Corp.1996 Form 10-K            

155

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|4-jj  |  | Cinergy Corp. CG&E       |  | Thirty-eighth Supplemental Indenture betweenCG&Eand The Bank of New York dated as of February 1, 2001.            |  | Cinergy Corp.March 31, 2001, Form 10-Q    
|----- |  | ------------------------ |  | ----------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------
|4-kk  |  | Cinergy Corp. CG&E       |  | Loan Agreement betweenCG&Eand the County of Boone, Kentucky dated as of February 1, 1985.                         |  | CG&E1984 Form 10-K                        
|4-ll  |  | Cinergy Corp. CG&E       |  | Repayment Agreement betweenCG&Eand The Dayton Power and Light Company dated as of December 23, 1992.              |  | CG&E1992 Form 10-K                        
|4-mm  |  | Cinergy Corp. CG&E       |  | Loan Agreement betweenCG&Eand the County of Boone, Kentucky dated as of January 1, 1994.                          |  | CG&E1993 Form 10-K                        
|4-nn  |  | Cinergy Corp. CG&E       |  | Loan Agreement betweenCG&Eand the State of Ohio Air Quality Development Authority dated as of December 1, 1985.   |  | CG&E1985 Form 10-K                        
|4-oo  |  | Cinergy Corp. CG&E       |  | Loan Agreement betweenCG&Eand the State of Ohio Air Quality Development Authority dated as of September 13, 1995. |  | CG&ESeptember 30, 1995, Form 10-Q         
|4-pp  |  | Cinergy Corp. CG&E       |  | Loan Agreement betweenCG&Eand the State of Ohio Water Development Authority dated as of January 1, 1994.          |  | CG&E1993 Form 10-K                        
|4-qq  |  | Cinergy Corp. CG&E       |  | Loan Agreement betweenCG&Eand the State of Ohio Air Quality Development Authority dated as of January 1, 1994.    |  | CG&E1993 Form 10-K                        
|4-rr  |  | CG&E                     |  | Loan Agreement betweenCG&Eand the State of Ohio Air Quality Development Authority dated August 1, 2001.           |  | Cinergy Corp.September 30, 2001, Form 10-Q
|4-ss  |  | Cinergy Corp. CG&E       |  | Original Indenture (Unsecured Debt Securities) betweenCG&Eand The Fifth Third Bank dated as of May 15, 1995.      |  | CG&EForm 8-A dated July 24, 1995          
|4-tt  |  | Cinergy Corp. CG&E       |  | First Supplemental Indenture betweenCG&Eand The Fifth Third Bank dated as of June 1, 1995.                        |  | CG&EJune 30, 1995, Form 10-Q              
|4-uu  |  | Cinergy Corp. CG&E       |  | Second Supplemental Indenture betweenCG&Eand The Fifth Third Bank dated as of June 30, 1995.                      |  | CG&EForm 8-A dated July 24, 1995          
|4-vv  |  | Cinergy Corp. CG&E       |  | Third Supplemental Indenture betweenCG&Eand The Fifth Third Bank dated as of October 9, 1997.                     |  | CG&ESeptember 30, 1997, Form 10-Q         
|4-ww  |  | Cinergy Corp. CG&E       |  | Fourth Supplemental Indenture betweenCG&Eand The Fifth Third Bank dated as of April 1, 1998.                      |  | CG&EMarch 31, 1998, Form 10-Q             
|4-xx  |  | Cinergy Corp. CG&E       |  | Fifth Supplemental Indenture betweenCG&Eand The Fifth Third Bank dated as of June 9, 1998.                        |  | CG&EJune 30, 1998, Form 10-Q              
|4-yy  |  | Cinergy Corp. CG&E
ULH&P |  | Original Indenture (First Mortgage Bonds) betweenULH&Pand The Bank of New York dated as of February 1, 1949.      |  | ULH&PRegistration Statement No. 2-7793    
|4-zz  |  | Cinergy Corp. CG&E
ULH&P |  | Fifth Supplemental Indenture betweenULH&Pand The Bank of New York dated as of January 1, 1967.                    |  | CG&ERegistration Statement No. 2-60961    
|4-aaa |  | Cinergy Corp. CG&E
ULH&P |  | Thirteenth Supplemental Indenture betweenULH&Pand The Bank of New York dated as of August 1, 1992.                |  | ULH&P1992 Form 10-K                       
|4-bbb |  | Cinergy Corp. CG&
ULH&P  |  | Original Indenture (Unsecured Debt Securities) betweenULH&Pand The Fifth Third Bank dated as of July 1, 1995.     |  | ULH&PJune 30, 1995, Form 10-Q             

156

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|4-ccc              |  | Cinergy Corp. CG&E
ULH&P |  | First Supplemental Indenture betweenULH&Pand The Fifth Third Bank dated as of July 15, 1995.                                                                                                                 |  | ULH&PJune 30, 1995, Form 10-Q                                         
|------------------ |  | ------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------
|4-ddd              |  | Cinergy Corp. CG&E
ULH&P |  | Second Supplemental Indenture betweenULH&Pand The Fifth Third Bank dated as of April 30, 1998.                                                                                                               |  | ULH&PMarch 31, 1998, Form 10-Q                                        
|4-eee              |  | Cinergy Corp. CG&E
ULH&P |  | Third Supplemental Indenture betweenULH&Pand The Fifth Third Bank dated as of December 8, 1998.                                                                                                              |  | ULH&P1998 Form 10-K                                                   
|4-fff              |  | Cinergy Corp. CG&E
ULH&P |  | Fourth Supplemental Indenture betweenULH&Pand The Fifth Third Bank, as Trustee, dated as of September 17, 1999.                                                                                              |  | ULH&PSeptember 30, 1999, Form 10-Q                                    
|4-ggg              |  | Cinergy Corp.            |  | Base Indenture dated as of October 15, 1998, between Global Resources and The Fifth Third Bank, as Trustee.                                                                                                  |  | Cinergy Corp.September 30, 1998, Form 10-Q                            
|4-hhh              |  | Cinergy Corp.            |  | First Supplemental Indenture dated as of October 15, 1998, between Global Resources and The Fifth Third Bank, as Trustee.                                                                                    |  | Cinergy Corp.September 30, 1998, Form 10-Q                            
|4-iii              |  | Cinergy Corp.            |  | Indenture dated as of December 16, 1998, betweenCinergy Corp.and The Fifth Third Bank.                                                                                                                       |  | Cinergy Corp.1998 Form 10-K                                           
|4-jjj              |  | Cinergy Corp.            |  | Indenture betweenCinergy Corp.and The Fifth Third Bank, as Trustee, dated as of April 15, 1999.                                                                                                              |  | Cinergy Corp.March 31, 1999, Form 10-Q                                
|4-kkk              |  | Cinergy Corp.            |  | Indenture betweenCinergy Corp.and The Fifth Third Bank, as Trustee, dated September 12, 2001.                                                                                                                |  | Cinergy Corp.September 30, 2001, Form 10-Q                            
|4-lll              |  | Cinergy Corp.            |  | First Supplemental Indenture betweenCinergy Corp.and The Fifth Third Bank, as Trustee, dated September 12, 2001.                                                                                             |  | Cinergy Corp.September 30, 2001, Form 10-Q                            
|4-mmm              |  | Cinergy Corp.            |  | Second Supplemental Indenture, dated December 18, 2001, betweenCinergy Corp.and The Fifth Third Bank, as Trustee.                                                                                            |  | Cinergy Corp.Form 8-K, December 19, 2001                              
|4-nnn              |  | Cinergy Corp.            |  | Rights Agreement betweenCinergy Corp.and The Fifth Third Bank, as Rights Agent, dated October 16, 2000.                                                                                                      |  | Cinergy Corp.Registration Statement on Form 8-A dated October 16, 2000
|4-ooo              |  | Cinergy Corp.            |  | Purchase Contract Agreement, dated December 18, 2001, betweenCinergy Corp.and The Bank of New York, as Purchase Contract Agent.                                                                              |  | Cinergy Corp.Form 8-K, December 19, 2001                              
|4-ppp              |  | Cinergy Corp.            |  | Pledge Agreement, dated December 18, 2001, amongCinergy Corp., JP Morgan Chase Bank, as Collateral Agent, Custodial Agent and Securities Intermediary, and The Bank of
New York, as Purchase Contract Agent. |  | Cinergy Corp.Form 8-K, December 19, 2001                              
|Material
contracts |  |                          |  |                                                                                                                                                                                                              |  |                                                                       
|10-a               |  | Cinergy Corp. CG&E
PSI   |  | Amended and Restated Employment Agreement dated October 24, 1994, amongCG&E,Cinergy Corp., PSI Resources, Inc.,
andPSI, and Jackson H. Randolph.                                                             |  | Cinergy Corp.1994 Form 10-K                                           
|10-b               |  | Cinergy Corp. CG&E
PSI   |  | Amended and Restated Employment Agreement dated December 30, 1999, among Services,CG&E, andPSI, and James E.
Rogers.                                                                                         |  | Cinergy Corp.1999 Form 10-K                                           

157

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|10-c |  | Cinergy Corp. CG&E
PSI |  | Amended and Restated Employment Agreement dated December 30, 1999, amongCinergy Corp., Services,CG&E, andPSI, and William J. Grealis.                          |  | Cinergy Corp.1999 Form 10-K                          
|---- |  | ---------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------
|10-d |  | Cinergy Corp. CG&E
PSI |  | Amended and Restated Employment Agreement dated December 30, 1999, amongCinergy Corp., Services,CG&E, andPSI, and Larry E. Thomas.                             |  | Cinergy Corp.1999 Form 10-K                          
|10-e |  | Cinergy Corp. CG&E
PSI |  | Amended and Restated Employment Agreement dated December 30, 1999, amongCinergy Corp., Services,CG&E, andPSI, and Donald B. Ingle, Jr.                         |  | Cinergy Corp.1999 Form 10-K                          
|10-f |  | Cinergy Corp. CG&E
PSI |  | Amended and Restated Employment Agreement dated December 30, 1999, amongCinergy Corp., Services,CG&E, andPSI, and Michael J. Cyrus.                            |  | Cinergy Corp.1999 Form 10-K                          
|10-g |  | Cinergy Corp. CG&E
PSI |  | Employment Agreement dated December 30, 1999, amongCinergy Corp., Services,CG&E,andPSI,and Jerome A. Vennemann.                                                |  | Cinergy Corp.1999 Form 10-K                          
|10-h |  | Cinergy Corp. CG&E
PSI |  | Amended and Restated Employment Agreement dated August 31, 2001, amongCinergy Corp., Services,CG&E, andPSI, and Charles J. Winger.                             |  |                                                      
|10-i |  | Cinergy Corp. CG&E
PSI |  | Employment Agreement dated February 12, 2001, amongCinergy Corp., Services,CG&E,andPSI,and R. Foster Duncan.                                                   |  | Cinergy Corp.2000 Form 10-K                          
|10-j |  | Cinergy Corp. CG&E     |  | Employment Agreement dated May 15, 2001, amongCinergy Corp., andCG&E, and J. Joseph Hale, Jr.                                                                  |  | Cinergy Corp.June 30, 2001, Form 10-Q                
|10-k |  | Cinergy Corp.          |  | Employment Agreement dated May 15, 2001, betweenCinergy Corp.and M. Stephen Harkness.                                                                          |  | Cinergy Corp.June 30, 2001, Form 10-Q                
|10-l |  | Cinergy Corp. CG&E
PSI |  | Employment Agreement dated May 15, 2001, amongCinergy Corp.,CG&E, andPSI, and Bernard F. Roberts.                                                              |  | Cinergy Corp.June 30, 2001, Form 10-Q                
|10-m |  | Cinergy Corp.          |  | Employment Agreement dated March 9, 2001, betweenCinergy Corp.and Timothy J. Verhagen.                                                                         |  | Cinergy Corp.June 30, 2001, Form 10-Q                
|10-n |  | Cinergy Corp.          |  | Amended and Restated Separation and Retirement Agreement and Waiver and Release of Liability dated February 15, 2002, betweenCinergy Corp.and Larry E.
Thomas. |  |                                                      
|10-o |  | Cinergy Corp.
PSI      |  | Deferred Compensation Agreement, effective as of January 1, 1992, betweenPSIand James E. Rogers.                                                               |  | PSIForm 10-K/A, Amendment No. 1, dated April 29, 1993
|10-p |  | Cinergy Corp.
PSI      |  | Split Dollar Life Insurance Agreement, effective as of January 1, 1992, betweenPSIand James E. Rogers.                                                         |  | PSIForm 10-K/A, Amendment No. 1, dated April 29, 1993
|10-q |  | Cinergy Corp.
PSI      |  | First Amendment to Split Dollar Life Insurance Agreement betweenPSIand James E. Rogers dated December 11, 1992.                                                |  | PSIForm 10-K/A, Amendment No. 1, dated April 29, 1993
|10-r |  | Cinergy Corp. CG&E     |  | Deferred Compensation Agreement betweenCG&Eand Jackson H. Randolph dated January 1, 1992.                                                                      |  | CG&E1992 Form 10-K                                   

158

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|10-s  |  | Cinergy Corp. CG&E |  | Split Dollar Insurance Agreement, effective as of May 1, 1993, betweenCG&Eand Jackson H. Randolph.                                 |  | Cinergy Corp.1994 Form 10-K                  
|----- |  | ------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------
|10-t  |  | Cinergy Corp. CG&E |  | Amended and Restated Supplemental Retirement Income Agreement betweenCG&Eand Jackson H. Randolph dated January 1, 1995.            |  | Cinergy Corp.1995 Form 10-K                  
|10-u  |  | Cinergy Corp. CG&E |  | Amended and Restated Supplemental Executive Retirement Income Agreement betweenCG&Eand certain executive officers.                 |  | Cinergy Corp.1997 Form 10-K                  
|10-v  |  | Cinergy Corp.      |  | Cinergy Corp.Union Employees' Savings Incentive Plan as amended and restated effective January 1, 1998, adopted December 18, 1997. |  | Cinergy Corp.1999 Form 10-K                  
|10-w  |  | Cinergy Corp.      |  | Amendment toCinergy Corp.Union Employees' Savings Incentive Plan, effective December 1, 1999, adopted December 10, 1999.           |  | Cinergy Corp.1999 Form 10-K                  
|10-x  |  | Cinergy Corp.      |  | Amendment toCinergy Corp.Union Employees' Savings Incentive Plan, adopted January 1, 1998, effective January 1, 2001.              |  | Cinergy Corp.June 30, 2001, Form 10-Q        
|10-y  |  | Cinergy Corp.      |  | Cinergy Corp.Supplemental Executive Retirement Plan amended and restated effective January 1, 1999, adopted October 15, 1998.      |  | Cinergy Corp.1999 Form 10-K                  
|10-z  |  | Cinergy Corp.      |  | 1997 Amendments to Various Compensation and Benefit Plans ofCinergy Corp., adopted January 30, 1997.                               |  | Cinergy Corp.1997 Form 10-K                  
|10-aa |  | Cinergy Corp.      |  | Cinergy Corp.Stock Option Plan, adopted October 18, 1994, effective October 24, 1994.                                              |  | Cinergy Corp.Form S-8, filed October 19, 1994
|10-bb |  | Cinergy Corp.      |  | Amendment toCinergy Corp.Stock Option Plan, amended October 22, 1996, effective November 1, 1996.                                  |  | Cinergy Corp.September 30, 1996, Form 10-Q   
|10-cc |  | Cinergy Corp.      |  | Cinergy Corp.Annual Incentive Plan, adopted October 18, 1994, effective October 24, 1994.                                          |  | Cinergy Corp.1994 Form 10-K                  
|10-dd |  | Cinergy Corp.      |  | Amendment toCinergy Corp.Annual Incentive Plan, amended January 25, 1996, effective January 1, 1996.                               |  | Cinergy Corp.1996 Form 10-K                  
|10-ee |  | Cinergy Corp.      |  | Amended and RestatedCinergy Corp.Annual Incentive Plan, effective January 25, 2002.                                                |  |                                              
|10-ff |  | Cinergy Corp.      |  | Cinergy Corp.Employee Stock Purchase and Savings Plan, adopted October 18, 1994, effective October 24, 1994.                       |  | Cinergy Corp.Form S-8, filed October 19, 1994
|10-gg |  | Cinergy Corp.      |  | Amendment toCinergy Corp.Employee Stock Purchase and Savings Plan, adopted April 26, 1996, effective January 1, 1996.              |  | Cinergy Corp.June 30, 1996, Form 10-Q        
|10-hh |  | Cinergy Corp.      |  | Amendment toCinergy Corp.Employee Stock Purchase and Savings Plan, adopted October 22, 1996, effective November 1, 1996.           |  | Cinergy Corp.September 30, 1996, Form 10-Q   
|10-ii |  | Cinergy Corp.      |  | Cinergy Corp.UK Sharesave Scheme, adopted and effective December 16, 1999.                                                         |  | Cinergy Corp.1999 Form 10-K                  
|10-jj |  | Cinergy Corp.      |  | Cinergy Corp.Directors' Deferred Compensation Plan, adopted October 18, 1994, effective October 24, 1994.                          |  | Cinergy Corp.Form S-8, filed October 19, 1994
|10-kk |  | Cinergy Corp.      |  | Amendment toCinergy Corp.Directors' Deferred Compensation Plan, adopted October 22, 1996.                                          |  | Cinergy Corp.September 30, 1996, Form 10-Q   

159

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|10-ll                          |  | Cinergy Corp.          |  | Cinergy Corp.Retirement Plan for Directors, amended and restated effective January 1, 1999, adopted October 15, 1998.                                                                                                                                                                                                                |  | Cinergy Corp.Schedule 14A Definitive Proxy Statement filed March 12, 1999
|------------------------------ |  | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------
|10-mm                          |  | Cinergy Corp.          |  | Cinergy Corp.Directors' Equity Compensation Plan adopted October 15, 1998, effective January 1, 1999.                                                                                                                                                                                                                                |  | Cinergy Corp.Schedule 14A Definitive Proxy Statement filed March 12, 1999
|10-nn                          |  | Cinergy Corp.          |  | Cinergy Corp.Executive Supplemental Life Insurance Program adopted October 18, 1994, effective October 24, 1994, consisting of Defined Benefit Deferred Compensation Agreement,
Executive Supplemental Life Insurance Program Split Dollar Agreement I, and Executive Supplemental Life Insurance Program Split Dollar Agreement II. |  | Cinergy Corp.1994 Form 10-K                                              
|10-oo                          |  | Cinergy Corp.          |  | Cinergy Corp.1996 Long-term Incentive Compensation Plan, adopted April 26, 1996.                                                                                                                                                                                                                                                     |  | Cinergy Corp.Schedule 14A Definitive Proxy Statement filed March 13, 1996
|10-pp                          |  | Cinergy Corp.          |  | Amendment toCinergy Corp.1996 Long-term Incentive Compensation Plan, adopted October 22, 1996, effective November 1, 1996.                                                                                                                                                                                                           |  | Cinergy Corp.September 30, 1996, Form 10-Q                               
|10-qq                          |  | Cinergy Corp.          |  | Amended and RestatedCinergy Corp.1996 Long-term Incentive Compensation Plan, effective January 25, 2002.                                                                                                                                                                                                                             |  |                                                                          
|10-rr                          |  | Cinergy Corp.          |  | Cinergy Corp.401(k) Excess Plan, effective January 1, 1997, adopted December 17, 1996.                                                                                                                                                                                                                                               |  | Cinergy Corp.1996 Form 10-K                                              
|10-ss                          |  | Cinergy Corp.          |  | Amendment toCinergy Corp.401(k) Excess Plan, adopted January 24, 2002, effective January 1, 2002.                                                                                                                                                                                                                                    |  | Cinergy Corp.Form S-8, filed January 31, 2002                            
|10-tt                          |  | Cinergy Corp.          |  | Cinergy Corp.Nonqualified Deferred Incentive Compensation Plan, effective January 1, 1997, adopted December 17, 1996.                                                                                                                                                                                                                |  | Cinergy Corp.1996 Form 10-K                                              
|10-uu                          |  | Cinergy Corp.          |  | Cinergy Corp.Director, Officer and Key Employee Stock Purchase Program, effective January 7, 2000, adopted December 10, 1999.                                                                                                                                                                                                        |  | Cinergy Corp.1999 Form 10-K                                              
|10-vv                          |  | Cinergy Corp.          |  | Cinergy Corp.Non-Union Employees' Pension Plan as amended and restated effective January 1, 1998, adopted December 18, 1997.                                                                                                                                                                                                         |  | Cinergy Corp.1999 Form 10-K                                              
|10-ww                          |  | Cinergy Corp.          |  | Cinergy Corp.Non-Union Employees' Severance Opportunity Plan as amended and restated effective June 1, 2001, adopted May 30, 2001.                                                                                                                                                                                                   |  | Cinergy Corp.June 30, 2001, Form 10-Q                                    
|10-xx                          |  | Cinergy Corp.          |  | Cinergy Corp.Union Employees' Retirement Income Plan as amended and restated effective January 1, 1998, adopted December 18, 1997.                                                                                                                                                                                                   |  | Cinergy Corp.1999 Form 10-K                                              
|Subsidiaries of
the registrant |  |                        |  |                                                                                                                                                                                                                                                                                                                                      |  |                                                                          
|21                             |  | Cinergy Corp. CG&E
PSI |  | Subsidiaries ofCinergy Corp.,CG&E, andPSI                                                                                                                                                                                                                                                                                            |  |                                                                          

160

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|Consent of
experts and
counsel |  |                              |  |                                           |  | 
|------------------------------ |  | ---------------------------- |  | ----------------------------------------- |  | 
|23                             |  | Cinergy Corp. CG&E
PSI
ULH&P |  | Consent of Independent Public Accountants |  | 
|Power of
attorney              |  |                              |  |                                           |  | 
|24                             |  | Cinergy Corp. CG&E
PSI
ULH&P |  | Power of Attorney                         |  | 

Each
registrant hereby undertakes to furnish to the Commission upon request a copy of any long-term debt instrument not listed above.

161

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CINERGY CORP.        SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS        FOR THE THREE YEARS ENDED DECEMBER 31, 2001(in thousands)

|Col. A                                                         |                                 | Col. B |  | Col. C |        | Col. D |   | Col. E
|-------------------------------------------------------------- | ------------------------------- | ------ |  | ------ | ------ | ------ | - | ------
|
|
|Accumulated Provisions
    Deducted from Applicable
    Assets |                                 |        |  |        |        |        |   |       
|                                                               | Allowance for Doubtful Accounts |        |  |        |        |        |   |       
|                                                               |                                 | 2001   |  | $      | 29,951 |        | $ | 41,163
|                                                               |                                 | 2000   |  | $      | 26,811 |        | $ | 22,746
|                                                               |                                 | 1999   |  | $      | 25,622 |        | $ | 20,805

162

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THE CINCINNATI GAS & ELECTRIC COMPANY        SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS        FOR THE THREE YEARS ENDED DECEMBER 31, 2001(in thousands)

|Col. A                                                         |                                 | Col. B |  | Col. C |        | Col. D |   | Col. E
|-------------------------------------------------------------- | ------------------------------- | ------ |  | ------ | ------ | ------ | - | ------
|
|
|Accumulated Provisions
    Deducted from Applicable
    Assets |                                 |        |  |        |        |        |   |       
|                                                               | Allowance for Doubtful Accounts |        |  |        |        |        |   |       
|                                                               |                                 | 2001   |  | $      | 19,044 |        | $ | 30,166
|                                                               |                                 | 2000   |  | $      | 16,740 |        | $ | 14,056
|                                                               |                                 | 1999   |  | $      | 17,607 |        | $ | 9,754 

163

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PSI ENERGY, INC.        SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS        FOR THE THREE YEARS ENDED DECEMBER 31, 2001(in thousands)

|Col. A                                                         |                                 | Col. B |  | Col. C |       | Col. D |   | Col. E
|-------------------------------------------------------------- | ------------------------------- | ------ |  | ------ | ----- | ------ | - | ------
|
|
|Accumulated Provisions
    Deducted from Applicable
    Assets |                                 |        |  |        |       |        |   |       
|                                                               | Allowance for Doubtful Accounts |        |  |        |       |        |   |       
|                                                               |                                 | 2001   |  | $      | 9,317 |        | $ | 8,339 
|                                                               |                                 | 2000   |  | $      | 9,934 |        | $ | 7,088 
|                                                               |                                 | 1999   |  | $      | 7,893 |        | $ | 11,036

164

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THE UNION LIGHT, HEAT AND POWER COMPANY        SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS        FOR THE THREE YEARS ENDED DECEMBER 31, 2001(in thousands)

|Col. A                                                         |                                 | Col. B |  | Col. C |       | Col. D |   | Col. E
|-------------------------------------------------------------- | ------------------------------- | ------ |  | ------ | ----- | ------ | - | ------
|
|
|Accumulated Provisions
    Deducted from Applicable
    Assets |                                 |        |  |        |       |        |   |       
|                                                               | Allowance for Doubtful Accounts |        |  |        |       |        |   |       
|                                                               |                                 | 2001   |  | $      | 1,492 |        | $ | 3,050 
|                                                               |                                 | 2000   |  | $      | 1,513 |        | $ | 2,555 
|                                                               |                                 | 1999   |  | $      | 1,248 |        | $ | 2,169 

165

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cinergy Corp., The Cincinnati Gas & Electric Company,
PSI Energy, Inc., and The Union Light, Heat and Power Company each duly has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

| |  | CINERGY CORP.
THE CINCINNATI GAS & ELECTRIC COMPANY
PSI ENERGY, INC.
THE UNION LIGHT, HEAT AND POWER COMPANYRegistrants |  | 
| |  | ----------------------------------------------------------------------------------------------------------------------- |  | 

|Date: February 28, 2002 |  |    |  |                                           
|----------------------- |  | -- |  | ------------------------------------------
|                        |  | By |  | /s/JAMES E. ROGERSJames E. Rogers
Chairman

166

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the indicated registrants
and in the capacities and on the dates indicated:

|Signature                               |                         | Title                                                                                                                                                    |                                               | Date             
|--------------------------------------- | ----------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | -----------------
|                                        |                         |                                                                                                                                                          |                                               |                  
|Cinergy Corp.                           |                         |                                                                                                                                                          |                                               |                  
|                                        | Phillip R. Cox*         |                                                                                                                                                          | Director of Cinergy Corp.                     |                  
|                                        | George C. Juilfs*       |                                                                                                                                                          | Director of Cinergy Corp.                     |                  
|                                        | Thomas E. Petry*        |                                                                                                                                                          | Director of Cinergy Corp.                     |                  
|                                        | Jackson H. Randolph*    |                                                                                                                                                          | Director of Cinergy Corp.                     |                  
|                                        | Mary L. Schapiro*       |                                                                                                                                                          | Director of Cinergy Corp.                     |                  
|                                        | John J. Schiff, Jr.*    |                                                                                                                                                          | Director of Cinergy Corp.                     |                  
|                                        | Philip R. Sharp*        |                                                                                                                                                          | Director of Cinergy Corp.                     |                  
|                                        | Dudley S. Taft*         |                                                                                                                                                          | Director of Cinergy Corp.                     |                  
|Cinergy Corp. and PSI                   |                         |                                                                                                                                                          |                                               |                  
|                                        | James K. Baker*         |                                                                                                                                                          | Director of Cinergy Corp.                     |                  
|                                        | Michael G. Browning*    |                                                                                                                                                          | Director of Cinergy Corp.                     |                  
|                                        | John A. Hillenbrand II* |                                                                                                                                                          | Director of Cinergy Corp.                     |                  
|CG&E and ULH&P                          |                         |                                                                                                                                                          |                                               |                  
|                                        | James L. Turner*        |                                                                                                                                                          | Vice President and Director of CG&E and ULH&P |                  
|PSI                                     |                         |                                                                                                                                                          |                                               |                  
|                                        | Larry E. Thomas*        |                                                                                                                                                          | Vice Chairman and Director of PSI             |                  
|Cinergy Corp., CG&E, PSI, and ULH&P     |                         |                                                                                                                                                          |                                               |                  
|/s/JAMES E. ROGERSJames E. Rogers       |                         | Chairman, Chief Executive Officer, and Director of Cinergy Corp., CG&E, PSI, and ULH&P (Principal Executive Officer)                                     |                                               | February 28, 2002
|/s/R. FOSTER DUNCANR. Foster Duncan     |                         | Executive Vice President and Chief Financial Officer of Cinergy Corp., CG&E, PSI, and ULH&P and Director of CG&E and ULH&P (Principal Financial Officer) |                                               | February 28, 2002
|/s/BERNARD F. ROBERTSBernard F. Roberts |                         | Vice President and Comptroller of Cinergy Corp., CG&E, PSI, and ULH&P (Principal Accounting Officer)                                                     |                                               | February 28, 2002

167

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| |  | /s/JAMES E. ROGERSJames E. Rogers Attorney-In-FactFebruary 28, 2002  
| |  | ---------------------------------------------------------------------
| |  | /s/R. FOSTER DUNCANR. Foster Duncan Attorney-In-FactFebruary 28, 2002

168

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